Higher Oil prices draining the Economy
Oil affects everything around us, from furniture to cars to clothes we wear. It was high time we talked about this resource that is being regulated beyond measure. Oil prices and Inflation are often seen as being correlated. Let us clarify the concept before we dive deeper into the effects of high crude oil prices today.
Inflation which is an indicator of price rise in an economy is correlated to crude oil price movement. The general principle is – higher oil prices increase the cost of inputs as it is consumed in major economic activities like transportation and heating, thus leading to higher inflation; over time, the degree of correlation has reduced due to a variety of factors, but more on that later.
Over the last year, oil prices have rallied to around $70 per barrel, leading India’s Central Bank revising its CPI Inflation projections in 2021-22 to 5.7% at its August meet, just 4 months into the year. WPI is expected to be in double digit territory for India till atleast the second quarter of FY22.
High fuel prices could lead to higher retail and food inflation at a time when the pandemic has eroded India's household savings and pushed millions of households into debt and poverty, economists tell us.
Almost every major sector is impacted by higher oil prices. India imports most of its oil requirements and it has a negative impact on the current account deficit; for every $10 rise in crude oil prices, the CAD widens by roughly 0.5% of India’s GDP.
From specialty chemicals and automobiles, to home building products and FMCG companies across the country have been impacted. While OPEC and its allies have agreed to increase production, albeit by a trifle, prices have been stable around the $70 mark and have been slowing the pace of growth in the India, which was already struggling even before the pandemic started due to a sleuth of disastrous policy decisions.
Another area of huge concern for India is higher transportation costs because the Government is constantly hiking fuel prices across the country in name of dynamic pricing leading to higher food and other raw material prices. A few points to back that up:
Officials at oil marketing companies have noted that even current record-high prices are lower than what refiners should be charging in line with international prices and that prices are set to rise further unless there is a cut on levies on fuels. In June, when prices were above Rs. 100 State and central taxes account for about 58 per cent of the pump price of petrol and 52 per cent of the pump price of diesel in the national capital. In 2020, the Central Government had hiked the excise duty on petrol and diesel by Rs. 13 and Rs. 16 respectively to counter for the loss in revenue due to the pandemic.
“There are signs that the age of petroleum has passed its zenith. Adjusted for inflation, a barrel of crude oil now sells for three times its long-run average. The large western oil companies, which cartellised the industry for much of the 20th century, are now selling more oil than they find, and are thus in the throes of liquidation.” – James Buchan
Don’t get us wrong, fossil fuels need to be taxed to dissuade people from using them so freely. But before doing that, the citizens need to also be given alternatives to them before being penalized for using them. More so, the other fuels need to be incentivized to be present in reasonable quantities. Without any sort of search, less than 5% of Passenger Vehicles in India would be EV’s.
Unless these measures and a basket of offerings are implemented, it would eat into the economic growth of the country every time the government hiked fuel taxes; doing so in the middle of a pandemic and the most gut wrenching recession that we have seen seems a bit reckless to say the least. The lack of direction with which to proceed will lead to the Government extracting as much as it can from its cash cow – fuel taxes.