The ongoing transition from an ‘oil economy’, to a ‘gas economy’, under PM Modi’s visionary leadership, is undeniably, the best anti-dote to insulate India from the vagaries of volatile global oil prices.

Exxon Mobil Corp, the mammoth Oil driller, posted its first annual loss in 2020, in at least 40 years, besieged by activist investors, lawmakers, climate-change campaigners and of course Covid induced lockdowns in large parts of the globe. Another Oil giant, BP Plc posted earnings that missed expectations, mainly due to weak fuel sales and refining margins. Big Oil was still trying to deal with the demand slump, when things steadily started looking up. In less than three months, between November 2020 and February 2021,global Crude Oil prices have surged by a massive 39%,fuelled by a vaccine rollout led, virus-recovery. The bull rally in oil prices was accentuated by declining global stockpiles. Global Brent Crude prices were just shy of $60 a barrel, on February,5,2021. There are pockets of physical-market strength, too. Royal Dutch Shell Plc went into a buying frenzy in the North Sea market on February 1st 2021, buying the most benchmark-grade cargoes in a single day, for the first time in 10 years in the S&P Global Platts, pricing window.
The rally in headline Crude prices and buying binge in physical markets comes amidst a decisively tighter structure in the Oil futures curve this year. A bullish momentum in Brent Crude Oil prices is further reflected by the fact that near-dated contracts are trading at a premium to later-dated ones, suggesting supply tightness. Last month’s pledge by Saudi Arabian Energy Minister Prince Abdulaziz bin Salman, to slash production by a further 1 million barrels a day has boosted global Oil market sentiment. Since fuel prices in India are primarily, market determined, the recent rally in Petrol and Diesel prices in India is part of a larger global phenomena and is not India specific. Since more than 80% of India’s Oil demand is met via imports, any surge in global Brent Crude price, obviously has a sizeable impact on India, too. The Indian Crude basket represents the published FOB prices of averaged Oman/Dubai Crude Oils for sour grade and Brent (dated) for sweet grade and, the composition is determined by the processing capacity. Simplistically speaking, Brent Crude had a 98% co-relation with the Indian Crude Oil basket, as compared to 88% for the West Texas Intermediate (WTI) variety, in 2019.
According to the US Energy Information Administration (EIA), India is currently ranked behind the United States and China as the world’s third-largest oil consumer. It consumed 206.2 million tonnes (over 4 million bpd) in the 2017-18 fiscal year. Oil cartel OPEC projected India’s oil demand to rise by 5.8 million barrels per day (bpd) by 2040, accounting for about 40% of the overall increase in global demand during the said period. As per EIA, India is set to replace China as the 100 pound Oil guzzling behemoth, in the next few years. Since in the final analysis, price of any commodity including Oil, is driven by demand and supply dynamics, those crying foul, each time Petrol or Diesel prices rise in India, should ask themselves, what have they done to contribute to greener fuels?
Oil still faces bumpy short-term demand amid concerns that new virus variants will lead to more lockdowns, while vaccine rollouts are slower than expected in some countries. But by and large, the world’s biggest vaccine roll out in India, which is also the world’s third largest Oil consumer, has buoyed sentiment. India achieved the unique distinction of vaccinating over 4 million people, in barely 20 days, a record by any measure!
Goldman Sachs had another bullish message for Oil markets recently, saying in a note that it expected global Oil demand to recover to pre-pandemic levels of 100 million bpd by August this year. According to Goldman, the Oil market was in a deficit of 2.3 million bpd in the final quarter of 2020. With supply still tight at the start of 2021, the immediate future for Oil prices is bright, despite expectations of a slow demand recovery, in many parts of the globe. Supply will grow slowly this year, Goldman Sachs noted, with the Oil deficit rising to 900,000 bpd during the first half of 2021. That’s up from an earlier projected deficit of only 500,000 bpd.
Goldman Sachs’s commodities chief, Jeffrey Currie said he expects Brent Crude to rise to $65 a barrel this year, citing structural underinvestment in the Oil industry, in recent times. The underinvestment is not just motivated by the global Oil price rout in 2020, but by the marked shift towards renewable energy investments. Other factors leading to the global bull rally in Oil are, the $1.9-trillion stimulus package proposed by President Joe Biden, which could boost U.S. Oil demand by 200,000 bpd. Biden’s moratorium on federal land drilling, the revocation of the permit for Keystone XL and the moratorium on all Oil and gas leasing in the Arctic National Wildlife Refuge, are the other key factors driving the recent surge in Crude Oil prices. A slow increase in non-OPEC supply, rising winter demand, depleting global inventories and Corona induced supply disruptions, will in turn, further, push up global Oil prices.
Speaking specifically of the recent Brent Crude price rise, well, that has been in the making since May 2020,driven primarily by factors like output cuts to the tune of about 9.7 million barrels per day in May, June and July last year, by Saudi Arabia led Opec, drilling by US shale oil wells falling to 2 year lows of barely 7.63 million barrels per day, output cuts to the tune of 7.7 million barrels per day between August and December 2020, fall in US crude Oil output by 2 million barrels per day, last year, demand recovery in China, which saw a 4.4% increase in industrial output in May 2020 and of course ,rise in consumption demand in USA, which saw retail sales rising by a solid 17.7% in May 2020.China’s industrial production rising by 7.3% year on year (YoY) in December 2020,only added to the bull rally in Oil, that started way back in May 2020.Demand in USA, despite the Wuhan virus, remained steady. Overall, total retail sales in the US for the first ten months of 2020 closed at $4.64 trillion, a 2.45% YoY increase. If this growth continues, 2021 will be on track to record the highest US retail sales. Since fuel consumption and overall demand resurgence are interconnected,it is only natural to expect global Oil prices to be firm, this year.
It is important to note here that net auto fuel marketing margins for Oil marketing companies (OMCs) in India, were back in the black, at over Rs 0.90/litre, only in July 2020,from minus Rs 1.28/litre in June 2020.Hence critics who allege that OMCs have been profiteering recklessly, are grossly mistaken. Fuel retailing in the country is dominated by State refiners and OMCs like Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, that own about 90% of all the retail outlets in the country. These OMCs suffered heavy losses when global Crude Oil prices crashed in March 2020,during the global pandemic. Due to the lockdown, in an extremely sensitive and benign gesture by the Modi government, the rise in excise duties and road cess in March 2020, were not passed on to end consumers, but was borne by these aforesaid OMCs, despite the fact that fuel prices are largely market driven in India. To set the prices of petrol and diesel, Indian Oil companies consider trade parity pricing (TPP).Trade Parity Price (TPP),consists of 80% of Import Parity Price (IPP) and 20% of Export Parity Price (EPP).
IPP represents the price that importers would pay, in case of actual import of product at the respective Indian ports and includes the elements of Free on Board (FOB) price + Ocean Freight + Insurance + Custom Duties + Port Dues, etc. Similarly, EPP represents the price which Oil companies would realize on export of petroleum products. This includes FOB price + Advance License benefit or ALB for duty free import of crude Oil, pursuant to export of refined products. Consequent to abolition of Customs Duty on Crude oil, the ALB is currently zero. To cut to the chase, while international Crude Oil prices do play a significant role, local fuel prices are derived from various other elements, which also play a crucial role, as is evident from aforesaid formulas.
For instance, often, higher Gasoline cracks also result in local fuel prices remaining high despite a sharp fall in Crude prices, as was the case in July 2019.The price of Brent Crude fell 10.57% last July, while Petrol price in Mumbai rose 2.45% in that month. In August 2019 alone, Crude prices globally, fell 8.68%, while Petrol prices locally in India, declined by only 0.95%,because Gasoline and Diesel crack prices went up by anywhere between a solid $4.5 and $9 per barrel. “Crack” is an industry term for the cost of separating the various component products of Crude oil, including gases such as Propane, heating fuel, Gasoline, light distillates like jet fuel, intermediate distillates like Diesel fuel, and heavy distillates like grease.
So Gasoline and Diesel Cracks also play a role. Theoretically, every $1/barrel fall or rise in Brent Crude price, leads to a 0.45/litre reduction or rise in product prices, assuming “other things” are constant. However, other things like the rupee-dollar exchange rate, cess, refining cost, import duties, shipping charges, freight rates and dealer commissions &profit margins, are never quite constant in the dynamic, real world. This explains why there may be a direct “cause and effect” relationship between the direction of global Crude Oil and local fuel prices, but certainly not in the same degree and magnitude. India’s ignorant opposition has often alleged that under the Congress led UPA-2,despite elevated Brent prices globally, local fuel prices were much lower. Well, that is because, fuel prices were only partially decontrolled under the inefficient, Congress-led United Progressive Alliance (UPA-2) government, with Petrol prices being deregulated only in June 2010. It was Prime Minister Narendra Modi-led NDA government that took the unpopular but bold and long overdue decision of decontrolling Diesel prices in October 2014.Hence, comparing fuel price movements under the Modi government, with the erstwhile Congress regime, is unfair and unacceptable. Also, don’t forget that, despite elevated global Crude Oil prices, the earlier, incompetent, Congress dispensation, deliberately kept local fuel prices artificially low, thereby passing on unwanted debt burden to future consumers.
For instance, the previous, Congress led government took loans by purchasing Oil bonds of Rs 1.44 lakh crore, that the Narendra Modi led, NDA government inherited. Not only this, the Modi government also paid Rs 70,000 crore on the interest part alone, which means, in total, the Modi government discharged debt obligations of the earlier Congress regime, by repaying over Rs 2 lakh crore. A father who leaves behind property for his next generations is seen with respect in the society but what one would say about the father who takes loans and turns bankrupt and thereafter, leaves the baggage for his generations to come? An inept Congress played the role of the reckless, prodigal father, in this case.
In June 2020,at the height of the global pandemic, the Congress continued to politicise the issue of fuel price dynamics, in India. Hypocrisy is in the Congress DNA. Ironically, in June, last year, Congress ruled states were at the forefront of VAT increases, with the Ashok Gehlot regime in Rajasthan, for example, raising VAT on Petrol from 30%, pre lockdown, to 38% in June 2020, and VAT on diesel, from 22%,to 28%.It would be apt to say that, politics aside, now that global Crude Oil price (Brent),has risen from just $18.38 per barrel in April 2020,to $59.30 per barrel, in February,2021,a massive 222.63% rise, in barely ten months, it is only logical to expect measured price hikes, locally too, as India imports about 83% of its crude Oil requirements. Do note that Brent Crude Oil price has risen by 39% in the last three months, with a 18% rise, in the last one month alone!
While presenting the Union Budget 2021, Finance Minister, the very dynamic, Nirmala Sitharaman, proposed an Agriculture Infrastructure and Development Cess (AIDC),of Rs 2.5 per litre on petrol and Rs 4 per litre on diesel. The new cess has been introduced to boost agriculture infrastructure in the country. Now, any new cess generally means end consumers will have to pay more to purchase the same item. But the AIDC won’t be burdening customers, because the government is reducing the Basic Excise Duty and Special Additional Excise Duty (SAED). Consequently, unbranded Petrol and Diesel will attract basic excise duty of only Rs 1.4 and Rs 1.8 per litre, respectively.
To nail the misinformation surrounding domestic fuel pricing, it is best to look at this real time, example—Petrol prices in Mumbai hit Rs 93.49 per litre on February 5,2021. Of this Rs 93.49,the Basic rate is Rs 30.82 per litre; Central government tax is Rs 20.18;State government VAT, surcharges and levies are Rs 38.95,per litre; Distributor margins work out to Rs 3.54,per litre. Clearly, it is not the Central government, but State government taxes that are the biggest component of Petrol prices and also the biggest reason, for the steep rise in domestic fuel prices.
Effectively speaking, State government taxes account for 41.66% of the final Petrol price, whereas Central government taxes account for only 21.59% of the final Petrol price, per litre. Hence, before pointing fingers at the Modi government, opposition leaders like a clueless Rahul Gandhi, whose party, the Congress, is a vital part of the ruling alliance in Maharashtra, would do well to do some number crunching! To cut to the chase, India, under Prime Minister Narendra Modi, is planning to increase natural gas consumption by 2.5x, as part of the energy mix, to 15% by 2030, from the current level of 6.2%. The ongoing transition from an “Oil economy”, to a “Gas economy”, under PM Modi’s visionary leadership, is undeniably, the best anti-dote to insulate India from the vagaries of volatile global oil prices, as India moves from strength to strength, on the path to a self reliant and “Atmanirbhar Bharat”.
Sanju Verma is an Economist, National Spokesperson of BJP & Author of the Bestseller, “Truth & Dare—The Modi Dynamic”.