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Crude shock! Will India suffer from Syrian strikes?

Author: Kingshuk Nag/Wednesday, April 18, 2018/Categories: Energy, Expert View

Crude shock! Will India suffer from Syrian strikes?

It may sound strange but with the US and its allies France and UK targeting Syria, difficult times are ahead for India. Oil prices which are on the rise will scale further highs putting the Indian economy in greater trouble. International oil prices have breached $73 a barrel – the first time to do since 2014. Though there are no clear indications about where oil prices will settle, some estimates predict that prices will go upwards for the next 2 years. Analysts safely project that global oil prices may hover upwards of $70 and below $80 over this period. If tensions escalate oil prices might go up to $100 a barrel with geo politics dominating over the demand – supply scenario. Syria is a very miniscule oil producer but is in the neighbourhood of Iraq, a major oil producing nation. Saudi Arabia and Iran – other major oil players — are in the extended neighbourhood. Moreover with Russia (another major oil producer caught in the conflict because it is siding with Syria) involved, things can turn murky and the situation could go out of control.  

82 per cent of India’s petroleum needs are imported, so India’s import bill will rise. But to some extent the government can step in to help consumers: this by moderating the increase in domestic oil prices by lowering the taxes on petroleum products. This is now upwards of 45 per cent and the government can help by moving petroleum products to the ambit of GST. Even if petrol and petroleum products are put on the highest bracket of GST of 28 per cent, this will lead to a sharp fall in the retail prices of petrol and diesel which is now at an all- time high. On April 12, petrol prices varied between Rs 73.94 and Rs 81.80 per litre in the metro cities of India. A decision can be taken not by the central government but by the GST Council that has representation from all states. With revenue objectives high on their priority, state governments (notwithstanding their lip sympathy for the masses) have been chary of reducing taxes on petroleum products. Besides central excise duty, state excise duty or VAT is also levied on petroleum products.  The latest Economic Survey has pointed out that rising oil prices are one of the biggest risks to the Indian economy crimping growth and spending. It said that a $10 barrel increase in oil prices reduces growth by 0.2-0.3 per cent, increases wholesale price index by 1.7 per cent and worsens the current account deficit by $9-10 billion.

Global oil prices are on the ascent not just because of the Syrian developments but due to a decision by the Organization of Petroleum Exporting Countries (OPEC) to curtail production with a view to force prices up. A decision was taken on November 30, 2017 to this effect to cut production to 32.5 million barrels a day and keep it effective for a year. Russia is also believed to be working in tandem with OPEC.

The only way to keep OPEC prices under check is through an alternative global oil source: Oil shale. The US sits on a huge reserve of oil shale (estimated to be at 1.3 to 3 trillion tons) and exploiting oil shale to produce it has the potential to convert US into an oil exporting country within a few years. In fact, it is this fear of being overwhelmed by shale oil that Saudi Arabia (the leader of OPEC) had abandoned its earlier policy of keeping oil prices sky high and relaxed production norms in 2014 – only to reverse it now. In June 2014, the price of oil was $100.26 per barrel but fell to $26.55 per barrel on January 20, 2016 when OPEC decided to produce more. After it reversed its policy, the price of oil went up to $60 per barrel in July 2016. As is known, when global oil prices fell the Indian government did nothing to pass on the benefits to the public.

Taking longer time frame global oil prices have swung violently. In 2008, global oil prices ruled at $145 per barrel. This was just before the global economic recession peaked in 2009 and is an indicator about what high oil prices can do to the world economy (although the recession was triggered by collapse of the financial markets). For India, in the good old days, how the economy would perform was a gamble on the bounty of the monsoons. Now, it has become a gamble on global oil prices!

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Kingshuk Nag
Kingshuk Nag

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