Growing fears of a supply shortage have led oil prices to abandon the inertia of the first half after Saudi Arabia and Russia extended voluntary production cuts until the end of the year and American oil Production is expected to reach the lowest level since May. Growing optimism about demand recovery in China, the world’s largest oil consumer, only added to the rally.
The rise in oil prices is unlikely to burn a hole in the pockets of motorists. The government is unlikely to announce an increase in pump prices from public sector fuel retailers, which dominate 90% of the market and have pricing freedom on paper.
Raising fuel prices at this time will fuel inflation when it shows signs of easing Opposition an opportunity to attack the ruling party in opinion polls. As a result, fuel retailers will once again get their hands on the can. The price freeze till 2022-23 had resulted in a combined loss of Rs 21,000 crore for IOC, BPCL and HPCL in the first half as the under-recovery on petrol and diesel reached Rs 12-14/litre at one point.
Prices remain frozen since May 2022, when the Center last cut excise duties and oil prices hovered around $85 per barrel. Rates were not lowered even after oil prices remained below $80 in recent months. As reported earlier by TOI, this was done to enable retailers to recoup past losses and build a cushion for the future. With good profits in the first quarter, the Center will certainly rely on support, making the sale of petrol and diesel unprofitable again. The falling rupee will further complicate the situation.
However, the impact on the economy will be different as India relies on imports to meet 80% of its oil needs. More expensive crude squeezes the government’s legroom for social spending by pushing up the import bill, which weakens the rupee by impacting the current account deficit (CAD). Higher oil prices will continue inflation fears and push the RBI to extend the interest rate pause for longer, dashing hopes for cheaper EMIs.
“If the rise in crude oil prices continues, it could be reflected in consumer inflation through direct (higher pump prices) and indirect effects (rising production and transportation costs),” said DK Joshi, chief economist at Crisil. “Fuel and core inflation have remained favorably below 5% so far and the inflation spike in July and August was entirely food-driven,” Joshi said.
