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Don’t burden oil PSUs PDF Print E-mail
Friday, 11 May 2018 04:41
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Oil prices will rise, so cut duties or let consumers pay

 

Thanks to the uncertainty over how long it would take US shale producers to increase output—new pipelines, vital to carrying capacity are expected to get functional next year—in a meaningful manner, oil prices were in any case rising steadily and nearly touched $75 per barrel on Tuesday as compared to $57 when Opec decided, in November 2017, to extend the 2016 production cuts for another year. With US President Donald Trump deciding to pull out of the Iran nuclear deal, oil is set for another round of higher prices. By how much will depend upon the strength of the US sanctions, but given the tight demand-supply balance and the lowered OECD inventories, even a small disruption is enough. While oil prices have been exacerbated by the fall in Mexican and Venezuelan production over the past few months—this resulted in an effective supply cut of 2.4 million barrels per day (bpd) as against the target of 1.7 million bpd—the Iran sanctions could change things far more dramatically.

To put this in perspective, after the Iran nuclear deal was arrived at under President Obama, Iran’s oil production rose by one million bpd from January 2016 when it was implemented—Iran is the third-largest producer in the Opec.  Since a tenth of India’s oil supplies come from Iran, the impact will be even greater, apart from the fact that Iran also supplies India oil at more favourable terms than other countries. As a result, if oil prices remain at $70+ for the rest of the year, India’s oil subsidies—on LPG and kerosene, since petrol and diesel are decontrolled —will rise by around a third over the budgeted Rs 25,000 crore.

While the budget may be able to bear the burden, the bigger problem is for the oil PSUs which, in the backdrop of the Karnataka elections, have stopped revising petrol/diesel prices. Should the government ask them to keep an informal lid on prices, the impact can be quite devastating—given oil PSUs sell 107 million tonnes of petrol and diesel in a year, withholding, say, a one rupee per litre hike translates to a daily under-recovery of around Rs 35 crore.

If the government is of the view that prices need to be kept under control in an election year, especially if oil prices continue to rise even more, the only way to justify this is by making a commensurate cut in excise duties and perhaps persuade state governments to reduce VAT rates. The problem with this, of course, is that it lowers the government’s ability to spend on infrastructure and other areas. Considering that, by and large, consumers have got used to diesel/petrol prices being benchmarked to global levels, it is perhaps best to let prices rise — that will also act as a check on rising demand.

 

 

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