Rising Oil Prices Fading Modi Govt’s Celebration, Predictive Measures

Oil Prices, determines the deficits of current and fiscal accounts, monetary policy, consumption and investment behavior. India has got the highest retail prices of petrol and diesel among South Asian nations and this fact is fading the celebration of Modi government on completing four years in tenure.

The world’s economy is being developed with oil as its lifeblood for over hundreds of years. It is directly responsible of about 2.5% of world’s GDP.

OPEC – The Controller of Oil Prices

World’s oil is being controlled by OPEC (Organization of Petroleum Exporting Countries). It often cater the supply by maintaining a quota system. There are 12 barons of oil who control the world’s supply of energy. Ali bin Ibrahim al-Naimi, Saudi Arabia’s Minister of Petroleum and Natural Resources, is the most powerful voice within OPEC.

If we see last week’s Brent Crude prices, it has already touched $80 a barrel. This is already been declared as “an artificial rise” in oil prices. Members of OPEC especially Saudi Arabia under Indo – US pressure already thinking to cool down these prices by enhancing supply. Some effect has already been noted with 4% decrease in the oil prices last night.

Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!

— Donald J. Trump (@realDonaldTrump) April 20, 2018

Role of Oil Price in Indian Economy

If Brent Crude price continue to increase then it is going to inversely effect the Indian economy since their deficit gap has widened and INR is declining against USD.

Moreover, any further upward trend in crude oil will accelerate the inflation in India. India is the third biggest importer of Crude Oil. So import bill of India will be sky high. Hence, resulting in a higher trade deficit. This will raise the demand of US dollar therefore, strengthening of dollar and weakening of INR. If INR weakens further, it will adversely impact importers because they will be paying a lot more for their imported goods.

Retail Oil price in India is relatively higher as compared to that in Pakistan as well. The reason of high petrol prices in India is high amount of taxes applied by both central and state governments unlike Pakistan.

Indian Government does not determine the prices, it has left the forces of demand and supply to determine it. About 40 to 50% of Indian taxes are applied on pump prices. This means that the prices will remain high in India.

Therefore, India is expected to take a long term review on retail pricing of oil and must take measures to cut it to safeguard customers from volatility of global market.

Predictive Measures for Long Term Solution

Meanwhile, the government has confirmed that they are looking for a long term solution. Following are some predictive measures for India:

• Firstly, the Government must improve the operating atmosphere. The supply operating bottlenecks like berthing delays, custom clearances, approval delays could be improved to reduce gap between investor interest and investor indifference. The avoidable cost to cover such bottlenecks is material by small private companies. Government must provide assurance of fiscal and agreement stability to these companies.
• Secondly, keeping in view the objective to improve productivity in production fields, government must go for technology contracts to improvise rates of petroleum from fields like Mumbai High.
• Thirdly, government can also plan for a oil price stabilization fund wherein both highs and lows of the prices can be absorbed and consumers can get benefit of the stability in prices.
• Finally, India must build strategic reserves of oil. This is the time to cater long term supply contracts.

These remedies will work for India in future to cope up with the rising oil prices. Lets see how the price moves in the next week and how Modi government will tackle the issue as they are celebrating 4 years of the Modi Government.