As the government continues to avoid using the term “slowdown” to describe weakening growth in the Indian economy, the prospect of an increase of anywhere between Rs 5-6 in pump prices of fuel as early as next fortnight may be the worst possible news.
The multiple drone strikes on Saudi Arabia’s Aramco over the weekend have impacted global oil supplies from that country and turned global oil prices volatile. Remember, benign prices of oil have been a significant factor in containing the spread of a deep slowdown across various sectors of the Indian economy for months now. But as the global oil market was pounded with 10 drones attacking two critical pieces of Saudi crude oil infrastructure, disrupting production of almost 5% of the world supply of oil, shock waves from this event will likely be felt on the Indian economy soon. India imports more than 80% of the oil it consumes and any event which could derail benign oil prices could also simultaneously hurt the Indian economy.
Analysts at Kotak Institutional Equities said in a note that the spike in global crude prices, even though temporary, will be negative for downstream oil marketing companies and that they did not rule out the possibility of moderation in marketing margins on auto fuels. “A $10/bbl rise in global crude and product prices may require OMCs to increase retail price of diesel and gasoline by Rs 5-6/liter in the following fortnight. Sharp jump in global crude prices may also put pressure on refining margins amid slowing demand, besides increasing absolute quantum of fuel and loss,” the note said.
If pump prices go up by Rs 5-6, as these analysts suggest, that will be a significant increase indeed.
Madan Sabnavis and Urvisha H Jagasheth of CARE Ratings said in a note that any sustained increase in oil prices is always going to be a cause of concern for India, considering we import more than 80% of our oil requirements.
“In the current financial year, India has imported 4.5 mb/d (April-July) of crude oil and our import dependency based on consumption has increased to 84.9%. Impact is to be felt in terms of trade deficit, on the markets, Indian basket of crude oil prices and exchange rate. We assume at the macro level with imports of 1643 million barrels of crude oil in FY20 a dollar increase in prices on a permanent basis would increase the bill by roughly USD 1.6 billion per annum,” the note said.
For now, the government has dismissed any impact of the strike on Aramco on India, saying supply disruption is ruled out. Petroleum Minister Dharmendra Pradhan tweeted on Monday that, “We have reviewed our overall crude oil supplies for the month of September with our OMCs. We are confident there would be no supply disruption to India. We are closely monitoring the evolving situation.” He also said that India has already got an assurance from Saudi Arabia against disruption in supplies.
But Brent price recorded a 19% jump at opening on Monday, the biggest gain in percentage terms since 1991. Though prices climbed down thereafter, they could well turn volatile in the coming weeks.
An analyst tracking the sector said that though the OPEC and the United States have enough strategic oil reserves to tide over the present crisis as Saudi Arabia goes about assessing and rectifying the damage, stakeholders in the game may choose not to let prices remain soft.
Meanwhile, in an interview to CNBC-TV18, RBI Governor Shaktikanta Das has also said that there will be a temporary impact on oil supplies and prices but whether it will also be long term can be assessed only after a few days.
“….it is going to be an impact on the crude prices, there will be an impact on currencies across the world and the markets also. You would have seen since morning it is impacting Indian currency and it will also, depending on how long it persists, have some impact on the current account deficit and perhaps on fiscal deficit if it lasts longer,” he said.
“What is important, why I said that we need 2-3 days more time is to see whether alternative sources of supply are coming and taking over that space and what is the roadmap the Aramco authorities have to put this 5% loss to put it back in operation. According to some estimates, it may take 2-3 months, but I would like to wait for the official position from the Saudi authorities on how much time they are going to take to fill up this gap which has been created. So temporarily, there will be some impact. Whether this temporary effect will last longer… I think the picture will become clearer in the next few days.”
Das added that India’s Current Account Deficit could be impacted if oil prices were to remain high. CAD occurs when a country spends more on its imports than it earns from exports. Currency fluctuations also cannot be ruled out due to volatile crude.
Sectors sensitive to fuel price changes are already a worried lot. There is growing apprehension of a further decline in sales of automobiles if fuel prices increase – automobile sales are already in the slow lane with record and sustained decline in the last 10 months. Increasing cost of ownership – excepting fuel, costs such as state level taxes, insurance premia etc – has already been cited as major factor in the general hesitation by consumers in investing in a new vehicle. If pump prices of fuels were to rise due to the Aramco strikes, the slowdown for the automobile sector will only get worse.
Similar fears are being expressed for India’s aviation sector. For one, Aviation Turbine Fuel (ATF), which accounts for the largest variable cost of any airline, is already heavily taxed. So if prices were to rise, airlines may be constrained to pass these on to flyers, further affecting growth in domestic flyers.
(The author is a senior journalist. Views are personal)