Consumers should get the benefit of falling oil prices

At a time when even deficit hawks are clamouring for an expansive fiscal policy to fight the severe economic consequences of Covid-19, it will be tempting for the government to exploit every opportunity to fund the welfare programmes. When oil prices first dropped to less than $30 per barrel, the Modi government had promptly increased the central excise duty. However, this will not result in increased revenue due to the enforced lockdowns and halting of economic activity.If the objective is to help the economy rebound and bolster government finances, there are better ways than raising petrol taxes. In fact, lowering it will increase the disposable income of consumers, who will go out and spend more on other goods and services. Apart from increasing incomes, it will also help the government collect higher indirect taxes. Many businesses, which are reliant on petrol, such as transport and logistics, will get a much-needed fillip by reduced petrol prices.Since the price of oil has a cascading effect on the general price level in the economy, maintaining petrol and diesel prices at the same level or increasing it can lead to higher inflation and can further dampen their demand. Moreover, additional revenue gained by the government is offset by increased subsidy payments and revenue foregone from sectors dependent on oil. Further, since petrol is outside the purview of GST, states will want their fair share as well and will competitively increase VAT on petrol.The additional amount that can be raised by petrol taxes is about Rs 30,000 crore, which will not make a dent to the Rs 8-10 lakh crore required for the post-pandemic economic revival package. It’s time to pass on the benefit to the consumers.This appeared in The Print's Talkpoint

Use the oil price crash to boost India’s strategic reserves

One area in which India can definitely use the lower oil prices to its advantage is to stock up on the commodity for future use. Like many other countries, India maintains strategic petroleum reserves (SPR), which is an inventory of oil for emergency purposes. To mitigate supply-side risks and cover for vulnerability to external oil shocks, India holds an emergency oil stockpile in underground salt caverns, which can provide around 4.5 days of import cover. There is additional capacity for five days of oil import cover, which must be filled up at this time when oil prices are at historic lows. Indian petroleum refineries hold an additional 65 days of import cover.India has been delaying the start of phase two of its SPR plans, which was to add another 12 days of oil storage capacity. This was to be done in partnership with either ADNOC (Abu Dhabi) or Saudi Arabia’s Aramco. It is probably the right time now to get this off the drawing board.Alternatively, we can also look at options outside India. We could persuade the Sri Lanka government to kick-start the utilisation of oil storage facilities at Trincomalee. This could be done in a mutually beneficial manner. We could also shop around for storage space in Oman (Ras Markaz) or the United Arab Emirates (Fujairah). Right now, we are in a bizarre situation where the storage space is more expensive than the commodity itself, but things will revert, and any investments now will help India in the long run when oil prices rise again.Finally, the private sector should look at this as an opportunity to lock into long-term contracts with oil suppliers based at current prices. The government can help the struggling Indian airline industry, for instance, by providing it lines of credit to enter into or renegotiate oil contracts.Here's the full article 

Let's make the most of dirt cheap oil

In a dramatic and unprecedented turn of events on Monday, crude oil began trading in negative territory for the first time since records began. The price on a futures contract for West Texas crude that was due to expire on 21 April crashed to minus $37.63 a barrel. This is a direct result of the market mayhem caused by covid-19, which has resulted in lockdowns around the world, brought economies to a screeching halt, and crushed demand for transport fuel. Reports say there is so much unused oil in the US that there is no space left to store fresh supplies. Storage costs money. Thus, oil producers had to pay to offload their stock.The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers. The global effort to contain the pandemic, international pressure, oversupply, and still-sluggish demand seem to have struck both Russia and Saudi Arabia hard. Though a production cut has since been agreed to, demand is estimated to have fallen far more than that.The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs). We should move quickly to boost our strategic petroleum reserves and strike long-term supply contracts with global oil suppliers.Read the full article here