Opportunity beckons as oil prices soften : The Tribune India

Join Whatsapp Channel

Opportunity beckons as oil prices soften

Any reduction in the import bill will bring relief as it helps in bridging the fiscal deficit

Opportunity beckons as oil prices soften

Bearish: It is a favourable time to bring petroleum products under the GST ambit. istock



Sushma Ramachandran

Senior Financial Journalist

AS the new government prepares for its first Budget, it will have an unexpected bonus of global oil markets remaining bearish. It was earlier expected that geopolitical tensions and supply cuts imposed by OPEC (Organisation of Petroleum Exporting Countries) Plus would lead to prices firming up, but this has fortunately not happened. Instead, the markets are subdued and the prospect of a Gaza peace agreement as well as slowing world demand has brightened chances of a moderate price scenario continuing for the rest of 2024.

The moderation in global prices will ensure that retail rates of products like petrol, diesel and liquefied petroleum gas are contained at existing levels.

The impact of international crude oil prices on the Budget is considerable given the sizeable outgo of foreign exchange on crude oil purchases from abroad. Any reduction in the import bill will bring welcome relief as it helps in bridging the fiscal deficit, which is set to drop to 5.1 per cent in 2024-25. The cost of imports in 2023-24 was estimated at $132.4 billion, slightly lower than the $157.5 billion spent in 2022-23. The shrinkage was largely due to the fall in average oil prices over the past two years, along with some savings on account of buying Russian crude at discounted rates.

The outlook on the oil front had in April been rather dismal. At the time, crude prices had shot up to $90 per barrel for the benchmark Brent crude after having been below $80 since January. The spike occurred due to an escalation of the West Asia crisis, with Iran launching strikes against Israel. Prospects looked dim then for any improvement in view of deepening geopolitical tensions as well as the determination of OPEC Plus to expand production cuts. In the case of the former, the West Asia conflict initially had little impact on oil markets, but the attacks of Yemen-based Houthi rebels on merchant shipping had created ripples. There were also concerns that oil supplies from the region could be affected in case there was a disruption of shipping through the key choke point of the Strait of Hormuz. Any blockage at this point, which accounts for the bulk of crude movement from the region, could have affected India’s oil shipments.

The situation has eased somewhat in recent months, though merchant shipping going through the Suez Canal is still affected by the depredations of the Houthi rebels supporting the Palestinian cause. For the time being, crude oil movement is continuing without any serious disruption. There is even a glimmer of hope that efforts to reach a pause in the Israel-Hamas conflict could conceivably succeed.

As for OPEC Plus — the cartel which now includes Russia and its allies — it announced voluntary output cuts by members amounting to 2.2 million barrels per day (bpd) last year in a bid to prop up the market. These are being phased out from October this year. This is much earlier than anticipated, thus ensuring that the bearish market trends will continue at least for this year. OPEC Plus, however, retains the mandatory production cuts on members, amounting to 3.66 million bpd up to 2025.

The early phaseout decision, along with reports of lower demand in the world’s biggest oil importer, China, has strengthened the softening trend in oil prices. Besides, output from non-OPEC producers is rising rapidly and oil inventories are growing further. This includes the US, Canada, Brazil and Guyana.

The result is that oil prices are now in the range of $80-83 per barrel, much lower than earlier anticipated for this year. This is a far cry from last year’s prediction by Goldman Sachs that crude would touch $100 by the end of 2024. Current price trends are at variance with earlier forecasts.

For a country like India, this is a huge relief as it imports over 85 per cent of its fuel requirements. The moderation in world prices will ensure that retail prices of products like petrol, diesel and liquefied petroleum gas are contained at existing levels. This is critical to keep inflationary pressures in check as any hike in rates, especially of diesel, has a cascading effect on the economy.

It also must be recognised that petroleum products, being out of the ambit of the Goods and Services Tax (GST), are viewed as the perennial cash cows to shore up state government revenue. The Karnataka government, for instance, has just hiked retail rates of petroleum products, evidently in a bid to boost revenue. A look at the levies on these products by various states is illuminating as it shows high tax levels. Most states impose a value-added tax, while others like Karnataka and Kerala levy sales tax on petrol and diesel.

The exclusion of alcohol and petroleum products at the time of launching GST was based on the premise that sufficient revenue may not be available from the new tax to meet the states’ needs. These two areas which provide enormous revenue were thus kept in the hands of the state governments which were concerned at the time about GST providing sufficient resources for their developmental schemes. Karnataka, for instance, is obviously in need of funds to finance new welfare programmes. Taxing petroleum products is the easy way out to raise these much-needed funds.

But the situation has altered dramatically since GST was launched in 2017, with revenue inflows rising rapidly over the past two years. These reached a peak of Rs 2.1 lakh crore in April. Concerns over adequate revenue are obviously misplaced now with the buoyancy in GST collections. Clearly, it is time for crude and petroleum products to be brought under the fold of this countrywide tax. The final decision lies with the states in the GST Council, but the Central Government will also have to bite the bullet and push for the inclusion of petroleum. This will ensure that taxation policies related to this critical fossil fuel are implemented in a uniform manner throughout the country.

It will also enable the formulation of overarching policies that will prioritise the country’s strategic interests on the energy front. The fact that global oil markets are softening right now makes it a favourable time to go ahead with such a move. 


Top News

Pune Police unable to track down probationary IAS officer Puja Khedkar’s mother booked in land dispute case

Pune police unable to track down Puja Khedkar's parents booked in Arms Act case

A team of Pune Rural police visits the bungalow of Manorama ...

Puja Khedkar had submitted fitness certificate while joining medical college

Puja Khedkar had submitted fitness certificate while joining medical college

The 34-year-old IAS officer faces accusations of using fraud...

Akal Takht Jathedar summons Sukhbir Badal, wants his reply to allegations by SAD leaders

Akal Takht Jathedar summons Sukhbir Badal, wants his reply to allegations by SAD leaders

He has been asked to appear at the Akal Takht within 15 days...

Rebel Akali leaders announce launching of SAD reform movement and a presidium system of collective leadership

Rebel Akali leaders announce launching of SAD reform movement and a presidium system of collective leadership

Tension prevails at SAD head office in Chandigarh as rebel A...


Cities

View All