Oil dips below $50/barrel: Petrol car users can save up to Rs 9,400 a year

With global crude oil prices going below $50 a barrel, India’s finance and petroleum ministries find themselves at cross-purposes in a way that recalls the Roman two-faced god of the month, Janus.
Before the first week of the New Year ended, the Indian basket of crude oil has come down from $105 a barrel in April 2014 to $49 on Jan 7. The price of petrol in Delhi has now come down to Rs 61.33 per litre from Rs 72.26 a litre last April while the price of diesel has also fallen from Rs 55.49 to Rs 50.51 during this period.
To make up for fall in taxes due to the sustained decline in prices, the government, on New Year’s Day, raised the basic excise duty on petrol and diesel for the third time in quick succession even as the expected price reduction on fuels failed to materialise. The government said the revenue collected from the additional excise would go towards funding an “ambitious infrastructure development programme”, including 15,000 km of road construction, for the current and the next financial year.”However, retail price of petrol and diesel will remain unchanged all over India despite additional excise duty of Rs.2/litre from midnight,” Petroleum Minister Dharmendra Pradhan tweeted after the excise hike on 1 January.
The money would fund welfare schemes, Pradhan said.
However, a report in the Business Today today quoted petroleum ministry sources as saying that while the government has increased the excise duty on petrol and diesel to rake in additional Rs 10,500 crore, it is now expected to allow oil companies to pass on the lower prices to consumers.
“The fall in petrol prices from July 1, 2014 to now is expected to lead to annual savings of Rs 1400 per annum per two-wheeler consumer and Rs 9400 pa per passenger vehicle (PV). The diesel price fall could save Rs 8100 pa per diesel PV. The savings in fuel expenses would leave additional money in the hands of consumers, which could push discretionary expenditure leading to higher sales of consumer durables and sales of vehicles if crude oil prices sustain at the lower levels for some time” said rating agency ICRA in a report.
While consumers have been spared the impact of the excise hike, fuel prices have a cascading effect on inflationary processes and the duty increase will artificially maintain the gap between the global and domestic price.
The most significant piece of reform in the sector has come with the deregulation of diesel in October after years of subsidizing the rich consuming this transport fuel. The falling global crude oil prices have helped the government reduce petrol price seven times since August and diesel price thrice since October. On the other hand, excise duty hits the oil companies hard, as all three state-run refiners – IOC, Bharat Petroleum and Hindustan Petroleum – recorded sequential drops in their gross refining margins in the September quarter, as falling crude oil prices led to inventory losses. Indian Oil reported a net loss of Rs. 898 crore in the July-September quarter against a net profit of Rs.1,683 crore in the same period last year, resulting in an inventory loss of Rs.4,272 crore.
Lauding the government’s decision to hike excise duty on transport fuels, industry chamber Assocham has called for installing an oil price regulatory mechanism to ensure a surplus to be used in hydrocarbons exploration and development.
“The oil and gas prices for the consumer would have to be kept at a reasonable level adjusted every quarter through an independent mechanism to create surplus that could then be utilised in exploration and development of oil/gas fields,” it added.
Assocham said the principle in price regulation should be to prevent precipitate fall in consumer level prices and create as much surplus as possible.
And what of this remarkable descent of oil, whose low prices drove growth in the post-War world, and is driving India’s concerned ministries to cross purposes?
Analysts ascribe quite a few reasons for the slide in prices – a threat of recession in Europe, cooling off of growth in China, the shale boom in the US and steady production from OPEC member states. OPEC’s decision not to cut production despite prices being in downward spiral is being seen as driven by Saudi Arabia’s long term strategy to drive US shale out of business.