The return of high global oil prices

A price was paid for keeping rates at artificially low levels. This impacted public sector oil marketing companies, which were saddled with huge under-recoveries in 2022-2023

Days after retail prices of petroleum products have been cut in India, the prospect of global oil markets firming up has become a real possibility. The benchmark Brent crude touched $85 per barrel on March 15, after months of hovering in the range of $75-82. The International Energy Agency (IEA) has also forecast that demand growth will be higher than anticipated in 2024, while geopolitical tensions are expected to cast their shadow on oil prices.

Yet the latest downward revision of domestic oil product prices was long overdue given the relatively low crude prices ever since January 2023. The reduction in petrol, diesel, and cooking gas prices was on the cards for some time, but the careful timing has made them a pre-election bonanza for voters. At the same time, pump prices were not allowed to rise despite the spike in world markets after mid-2022. Consumers have been protected from the volatility of world oil markets in recent years.

A series of price hikes were carried out in March-April 2022 after the Ukraine war began, but this was moderated by excise duty cuts in May 2022. Since then, domestic oil prices remained unaltered even in the face of short-term volatility in international markets.

A price was paid, however, for keeping rates at artificially low levels. This impacted public sector oil marketing companies, which were saddled with huge under-recoveries in 2022-2023. They managed to end the year in the black with profits estimated at about Rs 8,200 crore, but would have faced tougher times if global prices had not moved downwards from April.

Though the administered pricing mechanism was officially abolished years ago, oil marketing companies (OMCs) still follow government directives on product prices. These OMCs which control 90 per cent of oil refining and marketing in India include the Indian Oil Corporation, the Bharat Petroleum Corporation Limited, and the Hindustan Petroleum Corporation Limited.

These OMCs have had to face a fast-changing oil scenario in recent times. The situation has changed dramatically over the past year. Crude oil prices, which averaged around $94 per barrel in 2022-2023, softened considerably since then. This enabled the OMCs to make profits estimated at Rs 69,000 crore in the first three-quarters of FY2023-2024. Hence, the price cuts were an easy call right now.

Yet there are clouds on the horizon if current demand forecasts are to be taken seriously. Prices have suddenly begun to firm up and the International Energy Agency (IEA) has revised its global demand projections for 2024. The agency has raised its forecast of increased demand during the year from 1.2 million barrels per day (bpd) to 1.3 million bpd. The assessment has been made based on a variety of dynamic factors including the Yemen-based Houthi attacks on merchant shipping going via the Red Sea. The additional fuel needed by ships having to take the longer route up to the Cape of Good Hope has been mentioned as one of the reasons for higher oil demand. In addition, the agency found that the long lead time for shipments meant that 1.9 billion barrels of oil were at sea last month.

Another development weighing on demand forecasts is the drone attacks on Russian oil refineries that could have an impact on output. One such attack has reportedly led to a fire at one of the biggest Russian refineries. There are also reports of Ukrainian assaults having affected 12 per cent of refinery output in that country. Crude oil inventories have simultaneously fallen in the US owing to higher demand. This is being linked to lower interest rates and consequent pick-up in economic activity which raises fuel demand.

The volatility in world markets is worrying for an economy that imports over 80 per cent of its fuel needs. In case prices cross $90 per barrels as is being projected by some agencies, it would be a difficult burden for the exchequer to bear. Consumption of petroleum products is also likely to be driven up by the coming elections as petrol and diesel usage usually rises dramatically during this exercise.

Given growing geopolitical tensions, there is little the current regime can do in case international prices continue to harden except to continue contracting from the cheapest suppliers. The newly-elected government must review the fuel policy on a priority basis, and make any needed course corrections to ensure the protection of India’s long-term strategic interests.

(Sushma Ramachandran is a senior journalist.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.