Oil Prices in India a Reflection of the BJP's Failed Economy?

By: Indraneel Agasty

The price fluctuation of Petrol and Diesel and its frequent ups and downs is a trend that the Indian public follow closely. These are two products that determine the pace and stability of the economy as well as the life of the Indian middle class. This also works as a parameter upon which the Government and its policies are judged by the common man. If the prices are stable, they are deemed to be a worthy choice whereas if they are frequently rising, people claim that the Government is losing its hold over the economy. So is the Government really in control of the prices of these commodities that very well run as blood for a nation’s body? The answer is yes and no.

Petrol and Diesel are only the final retail products of a long chain market. The point of sale begins at their raw form, crude oil. India being an energy deficit country, imports 83% of its total crude oil demand from the international market. The international crude oil market is owned by a cartel, a group of nations that has historically competed with others for absolute market control. They presently hold majority control of the market, their decisions influencing most of the international deals and prices. This is the Organisation of Petroleum Exporting Countries (OPEC). OPEC’s prominent members are the Arab countries of Iran, Iraq, Kuwait, UAE and the de facto leader Saudi Arabia. Together the 14 member nations control almost three quarters of the world’s proven petroleum reserves at very low cost of production per barrel. But few of the big oil producers and exporters of the world, primarily Russia, USA and Canada have never been a part of this group or any other group for that matter. Their decisions are very independent and as a result very often clash with the interests of OPEC, thus giving rise to price wars. The price of the end products are, for a large part, dependent on the prices decided by the rate of production by these players in the market.

The recent drop

After the recent outbreak of CoViD-19 the worldwide market saw highly uncertain bearish stocks with almost all stocks falling due to lockdown in the global trade. Naturally this effect was visible in the oil market as well. Due to withering demand the market was over flooded with crude and so prices had started to slump. OPEC with Saudi in the lead held discussions with Russia and tried to come to a decision to bring in production cuts so as to bring back demand and stabilize prices. But to Russia, production cuts would mean missing out on global tenders, particularly in its Asian market. So, Russia refused to bring in production cuts and instead decided to continue production. An irate Saudi responded by bringing in threats to further increase production, thereby decreasing prices even further. Now, Saudi Arabia can afford to do that. Although their huge reserves have started to toe the end of the plateau period, they still have enough volume and low cost of production to choke the market with their low prices. So in a bid to gain maximum market share and to drive out competition, an all-out price war began, resulting in the worst one day drop of crude prices ever since the Gulf War. Rates dropped by 31% to trend European Brent crude at $31 per barrel at the time of writing this report. American West Texas Intermediate has dropped to $29 with Goldman Sachs reporting that it could fall further to $20. Saudi has played this production-price game few years back in 2014 against America when US production of hydrocarbons from Shale (an unconventional form of petroleum extraction) resulted in the lack of demand for conventional petroleum. But they had failed because US Shale proved to be too resilient and OPEC had to form OPEC+ in collaboration with Russia to finally introduce production cuts. Incidentally, Russia had already agreed to reduce production that time, so their reluctance to repeat it once again is understandable.

So what about India? If the global oil prices are falling, why isn’t the Indian buyer paying less for Petrol and Diesel? The answer lies in the Government’s taxation of the petroleum products. The only two products exempted from the BJP’s uniform taxation policy of GST are alcohol and petroleum. This means that the Government has absolute authority to tax these items at will. Right around the time that Prime Minister Narendra Modi assumed office, the shale boom occurred in USA giving rise to a global glut in oil prices. At the time of the UPA government, the crude prices were as high as $107 per barrel but by the end of 2014, the prices had fallen to way below $35 per barrel. Later on the market stabilized at around $50-$60 per barrel. But this wasn’t reflected in the prices of the final products. While Petrol and Diesel were priced per liter at around Rs. 71/- and Rs. 55/- respectively under the UPA regime, they are now priced at Rs. 75/- and Rs. 65/- per liter respectively even at far lower prices of $31 per barrel of crude. The common man is happy with the casual drop of petrol and diesel prices by 12 paise now or 10 paise then unaware of the fact that crude oil prices have dropped by more than $70 per barrel. The difference lies, as previously mentioned, in the rates of taxation. As compared to the previous regime, excise duties on petrol have risen by almost 150% from Rs. 9 per liter to Rs. 23 per liter. Diesel has a far worse scene with an excise duty raise of 444% from Rs. 3.5 per liter to Rs. 19 per liter now. Judging by the UPA’s rates and counting for inflation, Petrol should have been available to the public now at around Rs. 25-30 per liter and diesel at around Rs. 22-27 per liter. So why is the Government imposing such exorbitant rates of taxes on such important commodities?

A failed economy

The fact is the BJP has proven unworthy of handling the Indian economy. Their calculations and chanakya neeti and policy of propaganda reliance for securing vote banks is ineffective in taming the beast of Indian market. Their inability to bring down oil prices even after getting historically low crude oil prices across their tenure is an undeniable argument for that. Throughout the last year and few months before that there have been clear examples of this failure. All the budgetary provisions and benefits in the 2019 Annual budget were rolled back in a matter of months due to their unfeasibility. The ruling BJP refuses to accept data provided by dedicated agencies like the NSSO but only chooses to publicize the flawed data provided by their own executives. Defaulters of bank loans who owed a drastic amount to the public exchequer escaped the country and have still not been brought to book. The rupee has fallen to an all-time low of 74 per US dollar. To top this, the country’s finance minister seems clueless most of the time as to the machinations of the market. When leading economists including ex-PM Manmohan Singh expressed their fear for the current condition of the market, she responded by weird statements like, “I have no thoughts to what he said. He said it, I listened to it.” The truth is the present condition of the country’s economy needs proper servicing and cannot just be written off as a cyclical occurrence. Core sector growth rates have slumped and as a result a lot of employment has been lost. This was reflected in the merger of public sector banks and the mass ‘voluntary’ retirement of BSNL employees. The most outrageous and possibly clear indication of the Government being brought to its knees was in August 2019 when they made changes in policy to receive 1.76 Lakh Crore surplus reserve released by the Reserve Bank of India. That means the Government had to dig in to the Reserve Bank’s special rainy day purse for a last lifeline to save the economy. It is to be noted that this huge amount was 86 Thousand crores more than the budgeted amount of RBI surplus to be received which was 90 Thousand Crores. That means the Government had to take almost double the budgeted amount. A committee under ex- RBI Governor Bimal Jalan decided that RBI was holding a much larger amount in its contingency funds than required and so it should release more funds for the Government. This essentially meant that the Reserve Bank had to give almost its entire net income of the year 2018-19 to the Government without reserving anything. This has been proposed since the days of Governor Urjit Patel but he was strictly against this measure. Even recently, financial secretary Subhash Chandra Garg had expressed dissent over this issue. He was later removed from his position and the Bimal Jalan commission report was passed through. It must be remembered that these funds are reserved for possibilities of financial crisis. So if the Government feels the need to tap into these funds, we have to entertain the possibility that we are in a financial crisis.

As is evident, the Government is in dire straits with regards to the supply of money. With CoViD-19 creating terror even in the hearts of terrorists, a further market slowdown is expected. Thus, it is trying hard to extract money from all sources possible. The sudden fall in crude prices have created a big margin in sale of petrol and diesel. While throwing in bones of 12 or 14 paise reduction will keep the common public satisfied since they are mostly unaware of the workings of the international oil market, keeping the excise rates higher will allow greater flow of money into the broken treasury due to greater margin at sales.

About the author: Indraneel Agasty is an alumnus of IIT (ISM) Dhanbad with a Masters in Petroleum Engineering. He is working as an Asst. Professor of Petroleum Engineering in Presidency University Bengaluru and takes special interest in Petroleum Geopolitics.

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