Economics for everyone -The economics and politics of oil and its boil

India Infoline News Service | Mumbai |

The world`s top energy consumers must act quickly to control soaring oil prices before they trigger a global recession. According to experts, the situation regarding energy prices is becoming extremely challenging, if left un addressed, it may well cause a recession in the global economy.

Background


The world's top energy consumers must act quickly to control soaring oil prices before they trigger a global recession. According to experts, the situation regarding energy prices is becoming extremely challenging, if left un addressed, it may well cause a recession in the global economy.


Oil prices made their biggest single-day surge recently, soaring US$11 to US$138.54 on the New York Mercantile Exchange, an 8 per cent increase. On the same day, the United States announced a rise in unemployment. The burst higher, which also came on rising Middle East tensions, also raised the prospect of accelerating inflation by adding to already strained transportation costs. That gloomy outlook sent stocks tumbling, taking the Dow Jones industrials nearly 400 points.


The Indian Government has raised the domestic retail selling price of petrol, diesel, and domestic liquefied petroleum gas on June 4,2008, taking into account Indian basket prices at $113 a barrel. The global crude prices were holding above $123 a barrel inNew York Mercantile Exchange electronic trading on June 4. Apart from the price hike, the Government had also announced duty cuts, oil bonds, and higher upstream contribution to compensate the oil marketing companies, which were suffering heavy revenue losses for selling petroleum products below the cost price.


The Government of India announced an increase of Rs 5 per liter in petrol, Rs 3 per liter diesel prices and that of LPG by Rs 50 per cylinder.Government explained that the price hike had become necessary to curb the losses of oil marketing companies. Many states have already slashed sales tax on petrol and diesel and VAT on cooking gas to cushion the impact of the hike on consumers.


Impact on the Indian Economy


The revenue loss for the fiscal was estimated at Rs 2,45,000 crore. Had it not been for the increase, the three-state run oil firms BPCL, HPCL and IOC would have lost over Rs 245,000 crore in revenues this fiscal and would have run out of cash to import crude. States ruled by Left parties observed a shutdown, including two days in West Bengal, to protest the price increase.


India has somehow weathered the previous oil shocks, but the current one poses the worst threat yet to its economy. Oil price may soon move past $150 per barrel and as per some expert predictions, it will climb close to $400 per barrel by 2015. TheGovernment will need to do a lot of outside the box thinking to solve the catastrophe in the making.


The mind-boggling losses of Rs 245,000 crore of the oil companies have to be made up if they are not to go bust. Raising the prices of petrol and diesel notionally is neither here nor there, and only puts off the evil day. Tentative tinkering will only mean the double jeopardy of the crisis continuing unabated and postpone the fires of inflation.

Persistently high oil prices will soon start putting plenty of pressure on the major economic systems of the world. The government has artificially maintained prices at a certain level and this has meant saddling the country’s oil companies with mounting losses. This cannot possibly continue. Quite apart from the short-term impact of high prices, there are crucial questions that need to be answered about the management of India’s economic future given our growing dependence on crude oil imports.


The final price that we pay for petroleum products is based on the import parity price of petrol and includes freight costs, customs, excise and various state government levies as well as the education cess.


Even after the hike, we are partially insulated from the increase in prices in the international market. That’s the burden the oil companies have to bear after thegovernment pays a part of the subsidy. If they don’t get the prices they seek, they will chalk up losses, since their input costs are going up with the rise in global prices.


But what will happen if the entire price rise is passed on? Household budgets will be affected. The immediate impact will be on fuel bills. Cooking will get more expensive with LPG cylinders costing more. So will commuting to work, sending children to school and traveling for holidays.


The increased transport costs will have a ripple effect as transporters pass on the hike to consumers. That will immediately push up the costs of agricultural products. Those prices may go up for another reason: diesel generator sets are increasingly used to pump water in fields. So expect the cost of fruits and vegetables and other non-processed food products to go up soon after.

 

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