The unbearable burden of oil tax

On April 20 there was an historic drop in oil prices in Texas. The price of West Texas Intermediate (WTI) crude dropped all the way, not just to zero, but $37 below zero. That means the seller was giving money to the buyer to buy oil. Unthinkable and unprecedented.

Since then oil prices have recovered and WTI is trading at around $38+ per barrel. Its European cousin, called Brent Crude, is priced at $41 per barrel. This is roughly the import price that India pays. When the price was near zero, why didn’t we simply book an order for the entire year’s requirement? That’s called booking a future(delivery) contract. Alas it doesn’t quite work that way. Besides, India’s oil refining companies, which import crude, aren’t really geared up for doing such sophisticated futures contracting. For instance, if they book a large futures contract at a low price, who’s to say the price won’t fall even further? The manager who booked such an advance contract may be hauled up by the anti-corruption vigilance guys for having defrauded the company. So India’s oil imports are done somewhat oldfashioned way, without too much speculation into the future. So whenever crude oil prices change in the world, the oil refining companies in India pay less or more depending on the fluctuation. Obviously since the cost of refining crude oil into petrol or diesel is fixed, the price that they should ask at the petrol pump should also fluctuate according to global oil movements.

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