India urges OPEC to stop crude price spike in scratch-my-back diplomacy

IEA projection of rising demand for oil adds to New Delhi's worry

Indian government bosses plan to tell the West Asian oil producers yet again that persisting high prices of crude will lead to a permanent demand destruction in the energy market. Retail prices of petrol and diesel are close to Rs 100 in several Indian cities and the high prices are persisting due to the huge cold wave induced disruption in the USA supply lines that has piled on top of a voluntary cut in production by key OPEC economies. 

Petroleum and natural gas minister Dharmendra Pradhan has already said in exchange for India’s support against falling oil prices last year, the producers must reconsider the sudden jump in crude prices this year. Of particular concern to India is the one million barrels a day cut made by Saudi Arabia in January this year. India agrees with the assessment of the U.S. Energy Information Administration which expects Brent crude oil prices to average $56 a barrel in the first quarter of 2021 and somewhat lower $52 a barrel over the remainder of the year. The current higher prices are not acceptable, a source in the government said. It could impact decisions on investments into India from West Asia. 

“Our case is bolstered because January data shows some clear signs of deceleration”, said a top level source in the government. Aggregate demand for petroleum group products fell 3.3 per cent in January 2020 as per data released by the Petroleum Planning and Analysis Cell of the petroleum ministry on Tuesday. It is the first drop in aggregate consumption since August 2020. Since August was mainly a period of lockdown whereas most of the economy has opened up in January, the figures are, therefore, surprising. Globally too, the demand for oil in January was three per cent less, year on year.

At the same time, the revenue department of the finance ministry is doing a weekly exercise of how much additional cash is coming in from the higher oil prices, to the exchequer. If the GST revenues maintain their upward trend, a source in the government said, a cut in the duties is possible, even though in Parliament the ministry has maintained that no such steps are on.

While global oil suppliers are relishing the prospect of surge in demand for petro products in India for a long time, the Indian government hopes to inject a touch of here and now in the calculations. India’s job is, however, made difficult because in February, the International Energy Agency has released the India Energy Outlook-2021 which notes the country will consume 74 per cent more oil (8.7 million barrels per day or bpd) in 2040 from about 5 million bpd in 2019. Natural gas consumption should reach 201 billion cubic metres from about 70 now. In effect, India will essentially add another Japan to the global demand for energy products. 

A demand destruction is indeed possible, said Tarun Kapoor, secretary, ministry of petroleum and natural gas to Business Standard. Additional demand in the global oil market is coming only from Asia, basically China, India, Japan and South Korea.

Hot Oil:

The first dip in global oil prices will possibly happen only in March as the winter thaw happens in USA, freeing up production lines in the shale oil fields of Texas. By then Saudi Arabia is also expected to add one million bpd to the global production. A Wall Street Journal news report said the Kingdom could make the announcement in the OPEC plus meeting scheduled in March. 

If both happen, the price of Indian basket of crude could ease off from the current $ 63 a barrel. It was $ 54.79 in January and, a now almost forgotten, $19.9 in April last year. Demand for all petroleum products slid 10.8 per cent year on year since 1999, according to a Bloomberg analysis. As the price of one variety of oil, the West Texas Intermediate plunged below zero briefly in April the speculation was that oil prices would find it hard to reach even $40 a barrel, even after Covid subsides. Incidentally the Indian crude basket is the average of Oman & Dubai sour grades with Brent grade oil processed in Indian refineries in the ratio of 75.62 : 24.38 during 2019-20.

The scarcity situation has got compounded because domestic production in India has also remained subdued. In January, the total production was 95.4 per cent of January 2019. Since the cumulative production for this financial year has also lagged at 94.39 per cent compared with the same April-January period of 2019-20, there was no offsetting additional production to balance the international prices. 

There is no doubt that global oil prices cannot remain at the current steep level for even a month more. The lockdown in the global economy including especially for air travel is not going away anytime soon. Britain has extended restrictions on international flights till May and closer home as Covid again flares up in pockets, there shall be slowdown in demand for some time in domestic and international markets. 

India had stopped buying US crude almost as soon as Trump left the White House. It may now turn its attention to those shipments once those are resumed. It is already missing the language of Trump, who was quick to berate the oil producers whenever prices rose sharply and especially above $60 a barrel. 

The reasons global prices are hot because of the size of the total production loss from the Texas freeze. Estimates range between 16 million and 32 million, which means there is an immediate necessity for Saudi Arabia to restore the supply. No other producer has the level of spare capacity to make good on the loss so quickly. To make its decision easier, Russia hopes to push for increased production, even though Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman has said last week oil producers need to remain “extremely cautious” since uncertainty in the market is very high.

Tax problem:

Back home, with even RBI Governor Shaktikanta Das in an unusual move asking finance minister Nirmala Sitharaman to reduce duties on oil products, the situation has become piquant. For every litre of petrol, the centre charges a 2.50 per cent basic customs duty, a countervailing duty off three parts (Rs 1.40/ltr + Rs 11.00/ltr SAD + Rs 2.50/ltr AIDC) plus Rs 18 of additional customs duty, a basic excise duty at the rate of Rs 1.40, a special additional excise duty of Rs 11 and two cess of Rs 20.50. Diesel, likewise faces a similar obstacle race. In addition of course there are the VAT levies by each state. (see table)

Both governments shall find it extremely difficult to meet their revenue targets this year without the support of these taxes on oil products. The  revised estimates of tax revenues for each state bank heavily on the inflows from oil tax. A decision to cut some of those duties will have to wait till the finance minister makes her reply in Parliament on the Finance Bill. Till then the prospect of a lower oil bill at the pumps remain remote.