Explanation: Why fuel rates are rising in India?

Crude oil has once again landed in a controversy recently due to a hike in crude oil prices with Indian Oil Manufacturing Companies (OMC) taking the largest hit. Saudi Arabia being the largest crude oil supplier has increased crude oil prices while cutting production levels since the Covid-19 pandemic struck the world.

Saudi Aramco, Saudi Arabia's national oil company hiked the price of oil shipments to Asia by between 20-50 cents per barrel resulting in an increase in the total cost of light crude for the largest Asian importers such as India to $1.8 over the recent purchase price. However, northwestern European customers are still purchasing crude oil at the same price from Saudi Aramco. On the other hand, it has even cut the shipping costs for US customers. The move is a result of a decision by the OPEC+ group of oil-producing countries (OPC) to increase crude oil production by about two million barrels between May and July. Let us discuss what this move indicates.

The rise in shipping prices to Asian countries such as India may be a signal that there might be other concerns besides the normal price of crude that can impact the home price of crude for an importer. Experts say that India has been looking to diversify supplies away from Saudi Arabia.

Interestingly, fuel, petrol and diesel, prices in India is dependent on international market rates, which means if the crude prices go up in the international market then it will have a corresponding impact on India or vice versa.

Retaliating to Saudi Arabia plan to maintain production level low to keep oil prices elevated through April, India's own state-owned oil marketing companies are all set to cut imports from Saudi Arabia.

OPEC+ which includes a total of 23 major oil-producing countries worldwide had reduced crude oil production at the peak of the pandemic. That was when the price of Brent Crude went below $20 per barrel, had decided to maintain production levels low throughout April even when crude oil prices started recovering to the pre-pandemic level.

Constantly rising crude oil prices resulted in costly auto fuel and cooking fuel prices reaching a record high in India as it imports over eighty per cent of its crude oil requirements from Saudi Arabia. Cutting crude oil production to 1 million barrel per day by Saudi alone in April contributed to a rise in crude oil prices. According to published reports, Saudi is planning to reverse its production cut in three faces between May and July.

Brent Crude price has gone up to $62.84 per barrel on Wednesday, April 7, 2021, from about $40 per barrel in October 2020. It was trading above the $70 level in March 2021.

Earlier, Union Petroleum Minister Dharmendra Pradhan in the last week of March termed his Saudi counterpart' Prince Abdulaziz bin Salman advice to use its strategic petroleum reserves so that they can tackle the high crude prices as an undiplomatic. He disagreed with the approach taken by Saudi Arabia. India has created strategic petroleum reserves and they were filled with cheap crude.

Mr Pradhan has repeatedly called on the Organization of Petroleum Exporting Countries and its allies, known as OPEC+, to ease supply curbs.

In the meanwhile, a continuing rise in crude oil prices has impacted India's economy negatively with petrol, diesel and cooking gas prices reaching a record high. Petrol price in India has crossed Rs. 100 per litre mark in some states affecting the monthly budget of the citizens across the country.

Despite the oil marketing companies absorbing the partial impact of the price rise of crude oil, both diesel and petrol rates have risen significantly by about Rs. 7 per litre since the beginning of the year 2021. Central and state taxes were hiked in 2020 to boost the revenue amid lower economic activity. But the rise in crude oil prices has magnified the impact of such taxes.

However, the government is not opined of reducing/ cutting the excise duties on fuel. In fact, while replying in Rajya Sabha in February, Union Oil Minister Dharmendra Pradhan said that the centre and state governments rely heavily on collections from taxes on crude oil for meeting their developmental and welfare priorities. He added, they, the governments need some resources... (and) this (taxing petrol and diesel) has been a proven and substantial route by all the governments, whether the state governments or the central government," he had said. And, both the states and the central government are raising taxes according to their developmental needs.

In the past fortnight, diesel and petrol prices have been cut by 60 paise per litre by Indian oil marketing companies as crude oil prices have reduced over demand issues amid resurging Covid-19 cases.

Saudi Arabia has always been the second-largest supplier of crude oil to India after the United States displaced Iraq in February. According to credible sources India imported 2.88 million tonnes of crude oil from Saudi Arabia in January 2021. Reduced imports from Saudi Arabia would lead to increased imports from other gulf countries and the United States is aware of the developments.

Due to India's enormous crude oil requirements and its geographical proximity, Saudi Arabia will however continue to be India's largest source of crude oil imports no matter what may come.