In April 2020, just a few months into the Covid-19 outbreak, brent crude oil prices sank below $10 as countries around the world imposed lockdowns, borders were closed and people were forced indoors. Almost two years hence, as the world recovers from the pandemic and economies rebound, global crude oil prices have surged and how. In recent weeks, prices have topped $90 a barrel and inching closer to $95.
Interestingly, this comes at a time many countries are speeding up their efforts to switch to renewable energy, including setting clear targets to phase out petrol and diesel cars.
Why is crude oil rising? There are several reasons. Geopolitical tension has risen between Russia, which is the second largest oil producer in the world, and neighbouring Ukraine, with Russian forces amassing at the border, raising fears of an eventual invasion, which could shoot up energy prices globally. In January, there were drone attacks on oil facilities in UAE, another major oil producer. An outage on a major oil pipeline linking Saudi Arabia and Turkey further added to the pressures.
All this has happened at a time, global oil demand has picked up to levels seen before the pandemic, which producers are struggling to meet.
“Today producers are finding it harder than expected to ramp up output. Members of the cartel OPEC+, which agreed to cut output (in 2020) are routinely falling well short of their rising monthly production targets. Worldwide oil demand has now recovered to pre-pandemic levels, but supply is at least a million barrels per day short of that, according to the International Energy Agency (IEA),” said Dipanwita Mazumdar and Aditi Gupta, economists at Bank of Baroda.
Fuel prices in India were already on the boil in late 2021, with petrol topping Rs 120 a litre in some cities. In the past few weeks, even as globally oil prices have continued to rise, domestic pump prices have been steady; upcoming assembly elections in various states among the reasons. Unless prices cool globally, Indians will have to prepare for a huge spike in petrol and diesel prices in March, after the polls.
India is dependent on imported oil; it imports more than 80 per cent of the oil requirement. As oil price rises, so does the import bill and in turn the trade deficit.
In 2020-21, as oil prices crashed, the share of oil imports in total imports fell to 21 per cent. Between April-December this year, the share of oil imports has climbed back to near 26 per cent of total imports, according to the Bank of Baroda economists.
Sustained rise in oil prices will also have a bearing on the inflation in many ways. People will have to spend more for fuel. High fuel prices will in turn drive up transportation and logistics costs, which will make goods and services more expensive. Rising crude prices will also push up government subsidies on LPG and fertilisers.
“A 10 per cent increase in crude oil would push up WPI (wholesale price index) by 0.9 per cent to 1.0 per cent and CPI (consumer price index) by 0.4 per cent to 0.6 per cent,” said Mazumdar and Gupta.
India’s retail inflation touched a five-month high of 5.59 per cent in December 2021. Suman Chowdhury, chief analytical officer at Acuite Ratings and Research feels CPI inflation in January would likely further inch up closer to 6 per cent, the upper-end of Reserve Bank of India’s inflation target.
Major global central banks like US Federal Reserve and Bank of England have already begun tightening their monetary policies and the Reserve Bank of India is also expected to raise its benchmark rates in the current calendar year.
India reported a current account surplus in the previous financial year. But, high oil prices among other things will likely lead to a sizeable current account deficit this financial year, say economists.
“We revised our current account deficit (CAD) estimate for financial year 2022 to $46 billion, which is a substantial number. Next year (FY23) it will be even higher, we are talking of CAD at around 2 per cent of GDP or more,” said Chowdhury.
Rising crude oil prices will also raise the risk of further rupee depreciation. The rupee closed at Rs 74.68 to a US dollar on February 8, but could fall further if oil price rise sustains.
“The rupee position will be more volatile. Although India has good foreign currency reserves, the rupee may depreciate further. Our view is that by March 2023, the rupee may reach around Rs 77 to a dollar,” said Chowdhury.
All in all, high oil prices don’t augur well for India’s economy. Already, there is pressure on consumer demand, from daily necessities to bikes, as companies have raised prices multiple times due to rise in cost of raw materials. High oil prices will only pinch the consumer’s wallet and in turn the wider economy further.
There is a silver lining though. Higher oil prices could further drive up demand for electric vehicles. Already, sales of electric two-wheelers have been accelerating; sales of high-speed electric two-wheelers (speed of over 25 km per hour) saw a four-fold increase in 2021, although on a low-base. If petrol and diesel prices surge, more people will find EVs attractive going ahead.
