Oil has been on the boil in 2016. From plunging to $26 in February before climbing back to $50 in December, oil prices defined volatility.
It is often said that “all’s well when it ends well”, for that to be true for oil prices, the Organization of the Petroleum Exporting Countries or OPEC will have to stick to its resolution to cut production. Led by Saudi Arabia OPEC has decided to produce less oil, by nearly 1.8 million barrels per day.
This would mean prices would stay above $50 in 2017. Analyzing the OPEC decision and Russia’s keenness to join the production cut, the International Energy Agency (IEA) assumes that the demand-supply balance will tilt in favour of demand and deficit supply in the first half of 2017, itself.
Simply put, this means oil prices will zoom and this does not bode well for you or the Indian economy.
India, which depends on imports to meet 80% of its oil needs, will have to spend Rs 9,126 crore more every year for every one dollar per barrel increase in crude oil.
The challenge for the government will be to tackle inflation and current account deficit (CAD). Despite two previous years of drought, low crude had helped to keep inflation low. The downward spiral of crude since end-2014 had also tamed India’s oil import bill from $112 billion in 2014-15 to $64 billion in the last fiscal, this in turn helped the government in trimming the CAD.
The Union Budget 2016 had projected a 3% cut in the subsidy bill. And this cut was aided by a 10.2% cut in oil subsidy. This math was done considering an average import price of crude oil at $48 per barrel for this financial year.
Reportedly, Budget 2017 will assume an average crude oil price of $55-$60 per barrel. But the fiscal math will go awry if IEA’s prediction comes to pass. One of the economic advisors to the finance minister said: “We have elbow room till crude hits $60 per barrel. One spurt does not change the math.”
An increase in global crude prices would mean a subsequent increase in petrol and diesel prices in India. A direct impact on your fuel bill!
“With the production cut, we expect price of petrol to rise 5-8% and that of diesel by 6-8% over the next 3-4 months. Rising crude prices also means profitability of public sector refiners would improve in the third quarter of the current fiscal driven by inventory gains,” said Rahul Prithiani, director, CRISIL Research.
It is just not an increase of your fuel bills, but every rupee per litre increase in fuel leads to 0.02-0.07% rise in WPI inflation. This means a significant increase in your monthly grocery bill, as well.
The only relief could be the fact that OPEC’s track record in sticking to production cut resolutions is poor.
Since 1989, OPEC has negotiated many such cuts but seldom stuck to it. Though experts point out that this time it could be different.
“The important thing will be to see if OPEC manages to stick to its commitments. Though chances of them sticking to it is higher this time given the economic situation of these countries,” said RS Sharma, former CMD of ONGC.
Russia, a non-OPEC country, supporting the OPEC move and also agreeing to a production cut, increases the chances of this commitment being met. Experts also point out that stretched economic conditions in the oil exporting countries and the fact that major importing countries like China is yet to fully recover. Keeping these conditions in mind, OPEC could change their bad track record this time.