Indian government hiked excise duty on petrol and diesel in the backdrop of falling crude oil prices because of the Saudi-Russia oil price war. This is not the first time the government has decided to increase rates at such a time. The oil price war is burning a hole not only in Russia’s pocket but also in the oil giant Saudi Aramco’s. The price war is likely to sustain until the pandemic cedes.
Crux of the Matter
Since the OPEC+ oil reduction deal between Saudi Arabia and Russia collapsed, oil prices have drastically come down. Per barrel cost of Brent Crude Oil as on 16 March 2020 hovered around $31 as compared to $68 at the beginning of the year. Prices slashed because Saudi retaliated to Russia’s refusal to decrease oil production amidst slowing demand due to Coronavirus. Oil prices plummeted after Saudi retaliated by offering oil at cheaper rates and increasing oil production by 2.5 mn barrels per day. You can read more about the Saudi-Russia oil price war here.
Saudi’s Misfired Retaliation? Although unlike Russia, the oil-dependent Saudi has the capacity to survive the price war for quite a long time, it is going to burn a hole in its pocket. Saudi had an estimated budget deficit of 6%. However, if the oil price remains around $30/barrel for the remainder of its fiscal year (ending in December 2020), Saudi’s budget deficit could widen to 12%, requiring additional finance of up to $36bn. According to the International Monetary Fund (IMF), Saudi can balance its budget if the crude oil is priced at $83/barrel.
Moreover, the oil-giant Saudi Aramco has taken a hit because of the price war and decreasing oil prices. The company floated its share to the public for the first time last year. It’s Initial Public Offering (IPO) was priced at 31.50 SAR (Saudi Riyals). Due to the oil price war, it traded lower than its IPO price at approximately 27 SAR on 16 March 2020.
Saudi Aramco share price since IPO (in Saudi Riyals)
It also reported an income drop of $22.9 billion, a 21% decline in its Net Profit for the year 2019.
The recent COVID-19 outbreak and its rapid spread illustrate the importance of agility and adaptability in an ever-changing global landscape. – Amin Nasser, Saudi Aramco CEO
India’s Oil Conundrum Indian Oil companies reduced the price of petrol by 13 paise per litre and diesel by 16 paise per litre. However, the Indian government hiked Rs. 3 in excise duty on petrol and diesel amidst the falling crude oil prices. At a time when the government revenue is thin, it will earn an additional revenue of approximately Rs. 40,000 crores, which can be invested in infrastructure and other developments. India’s per barrel cost was reduced to approx Rs. 2,552.56. It is close to the price level towards the end of 2015. In December 2015, retail price of petrol was around Rs. 60 and diesel around Rs. 46. During 2014-16 when the global crude prices were low, the Indian government did not pass the benefit to the consumers and raised the excise duties 9 times between November 2014 – January 2016. It added nearly Rs. 10 lakh crores to its fuel revenue.
Price breakup of fuel in Delhi (14 March 2020)
The Modi-Shah government has looted the people by increasing excise duties and huge taxes on petroleum products and did not bring this under GST despite the consistent demand of Congress. – Ajay Maken, Congress Spokesperson
The opposition criticized the government’s move, terming the move as ‘anti-people’. Ajay Maken, Congress’ senior spokesperson asked the government to slash fuel prices by at least 35-40%. He added that under the Modi regime, fuel prices have been hiked more than a dozen times. The government said that the increased price will not affect the consumers as it will be set off against the reduction in the basic petrol price based on the 15-day trailing price.
Today I met Hardip Puri the MoCA to urge him in view of Coronavirus to cut Airline Turbine Fuel taxes, which is presently at a world highest at 40% of airline costs. Puri said he agreed and is seeking GST Council urgent meet for a comprehensive tax cut for our airlines — Subramanian Swamy (@Swamy39) March 13, 2020
Curiopedia
Impact of Reduction in Oil Price – A major rise or decline in oil prices can have both economic and political impacts. The decline in oil prices from 1985–1986 is considered to have contributed to the fall of the Soviet Union. Low oil prices could alleviate some of the negative effects associated with the resource curse, such as authoritarian rule and gender inequality. Lower oil prices could however also lead to domestic turmoil and diversionary war. The reduction in food prices that follows lower oil prices could have positive impacts on violence globally. Research shows that declining oil prices make oil-rich states less bellicose. Low oil prices could also make oil-rich states engage more in international cooperation, as they become more dependent on foreign investments. The macroeconomics impact on lower oil prices is lower inflation. A lower inflation rate is good for consumers. This means that the general price of a basket of goods would increase at a bare minimum on a year to year basis. The consumer can benefit as they would have a better purchasing power, which may improve real GDP. However, in recent countries like Japan, the decrease in oil prices may cause deflation and it shows that consumers are not willing to spend even though the prices of goods are decreasing yearly, which indirectly increases the real debt burden. Declining oil prices may boost consumer-oriented stocks but may hurt oil-based stocks. More Info
Curated Coverage
Hindustan Times – Saudi Aramco’s net income drops to $88.2 billion in 2019
Economic Times – Saudi Arabia’s economy can ill afford oil-price war it began
Hindustan Times – Centre hikes duty on fuel; opposition calls it ‘anti-people’
Economic Times – Aramco to cut capital spending over coronavirus; 2019 profit plunges
Hindustan Times – Petrol price cut by 12 paise per litre, diesel by 14 paise
Economic Times – Congress slams govt over hike in excise duty on petroleum, diesel
Comments