Reversing Trend in Oil Prices

What is the issue?

• The declining trend in global crude oil prices has started to reverse.
• It calls for the government to take notice and formulate appropriate energy policy in terms of price and energy options.

What was the three year trend?

• India witnessed a three-year oil bonanza starting from the 2014-15 period.
• The average price of the Indian basket of crude oil was around $46 a barrel in the last year.
• The resulting gains were substantial for the oil sector, the economy, and the government.
• Oil companies began turning in higher profits and retail selling prices for petrol and diesel also relatively fell to an extent.
• Resultantly, the Union government’s subsidy bill for petroleum products declined significantly.
• It also used the opportunity to increase taxes on petroleum products to reap the benefits from falling crude oil prices.
• Its excise duty collections during these three years saw a cumulative annual growth.
• This in turn contributed to staying on the path of fiscal consolidation.

What are the recent developments?

• The declining trend in oil prices has started to take a turn from the beginning of 2017-18.
• The average price of the Indian basket of crude oil has risen in the recent months.
• The latest numbers crossed the $60-mark for the first time this year for two consecutive months.
• Retail prices of petrol and diesel have also inched up compared to prices in the previous year.
• In response, the government intervened recently to reduce excise duty on petrol and diesel, resulting in an annualised revenue loss.
• As a consequence of higher crude oil prices, the government’s petroleum subsidy bill has also risen.

How does the future look?

• There are no signs of the international crude oil prices declining from their current elevated levels.
• However, India’s energy demand in the next few decades is expected to increase faster than that of any other large country.
• India's dependence on energy imports would also rise in the coming years.
• Technological developments and sustainability issues are also getting to be considerable challenges.

What should be done?

• The challenges and limitations have to be considered in government's pricing of energy products and fiscal policy options.
• The government should refocus its attention on an integrated energy policy.
• The feasibility and scalability of the renewable energy sector should also be given enough focus in the energy policy.

Source: Business Standard