Crude oil prices have plunged 20% since March and are now below $75 a barrel, raising hopes of a sharp cut in petrol and diesel prices in India, the last of which was revised ahead of a general election. Mint Analyze the possibility of a price cut and how it would affect the economy:
How have global crude oil prices behaved?
Globally, crude oil has fallen by a sharp 19% since April. At $72.48 now, the Indian crude basket is at its lowest level since August 2021, when it was at $69.8 per barrel. Since the pandemic, when prices fell to a two-decade low of $19.9 in March 2020, prices have swung wildly. Prices crossed $100 per barrel for the first time since 2014 in March 2022 to hit a decade-high of $116 per barrel in June 2022. But then they declined to settle below $80 per barrel by the end of fiscal 2023. In the last fiscal year, prices spiked to over $90 per barrel in September but mostly remained within a range of around $81-84 per barrel.
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What are the reasons for the decline?
Prices have largely fallen due to lower demand from China, the world’s largest oil importer. In its monthly report last Tuesday, OPEC lowered its global oil demand forecast for the year to 2.03 million barrels per day (bpd) from its previous estimate of 2.11 million bpd. This was the second consecutive month of downward revision: its original demand projection in July was 2.25 million bpd. It also lowered its growth estimate for 2025 from 1.78 million bpd to 1.74 million bpd. Geopolitical tensions also have a major impact on oil prices, but most fears of a further escalation of tensions have been unfounded.
Why haven’t fuel prices changed?
Petrol and diesel prices were deregulated in India in 2010 and 2014 respectively, and until 2017, oil marketing companies changed prices fortnightly. Since then, prices are supposed to be revised daily, but that has not happened. On March 15, petrol and diesel prices were reduced by 1.5%. ₹2 per litre each, ending a price freeze dating back to April 6, 2022.
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What is the likelihood of a price cut in the future?
Petroleum Secretary Pankaj Jain said oil companies would consider a cut in retail prices if global crude remained low for an extended period. Typically, the alignment of low crude prices and upcoming elections has resulted in a price cut. With elections in Haryana and Jammu and Kashmir due in the next 20 days, to be followed by Maharashtra and Jharkhand later this year, hopes have risen for a sharp price cut. Experts believe there is scope for a price cut. ₹Reduction of 10 per liter in gasoline and ₹6-7 per liter of diesel cut.
How will the fall in oil prices affect the economy?
It will reduce the operating costs of over 5.8 million diesel-powered goods vehicles, 60 million cars and 270 million two-wheelers that run mostly on petrol. Cheaper diesel leads to reduced transport and logistics costs that reduce inflation as most goods are transported by road. Part of the savings for car and two-wheeler users translates into spending in other sectors of the economy. The lower international price also reflects favourably on India’s current account deficit as over 85% of the country’s crude oil needs are imported.
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