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Stabilising fuel prices

K Raveendran writes about the relief from contrarian oil price scenario coming true after fluctuations in the past

Stabilising fuel prices

When petrol and diesel prices were heading up to their historical heights in the middle of last year, this column had made a contrarian projection (Modi's oil stars may be turning benevolent again, June 29) that by the time Prime Minister Modi would be about to demit office at the end of his tenure, his 'oil stars' may turn favourable again. Of course, the projection was made on the basis of likely developments in the international crude markets as understood by analysts, although such a drastic change within the projected timeframe may have appeared highly unlikely at that time.

But such a scenario has turned real by now. As Modi and his NDA prepare to face the 2019 Lok Sabha elections, prices of petrol and diesel have come down to such levels that the prime minister has no worries on this front, which was not the case six months ago. For instance, petrol prices have eased by Rs12 a litre over the past three months. And if he loses the opportunity for a second term, it may not be due to inflation caused by high fuel prices, but other factors, of which there are plenty.

Contrast today's prices with those prevailed in October last year. Petrol and diesel prices had touched record levels last year, with petrol selling at 82.72 per litre in Delhi, Rs. 88.18 in Mumbai, Rs. 84.54 in Kolkata and Rs.85.99 per litre in Chennai as on October 15. The continued spike forced Modi to call a meeting of the oil company chiefs, which was preceded by finance minister Arun Jaitley announcing a cut in excise duty by Rs.1.50 a litre. Additionally, the state-owned oil marketing companies were mandated to reduce prices of petrol and diesel by Re 1 a litre each.

Modi was lucky to reap the benefit of an oil bonanza when he took office in 2014 as it coincided with a crash in global crude oil prices. Since he assumed charge in May, the price of the Indian basket of crude oil crashed from $113 per barrel to $50 by January. The dream run went on for a year when the price further tumbled to $229. This put the Modi government in a unique situation to manage the fiscal deficit and allocate resources to the new government's priority programmes if there were any.

As 2018 approached, the oil stars in Modi's horoscope apparently started looking away. International crude oil prices were climbing consistently and, with dynamic pricing of petroleum products in place, this meant that consumers had to dish out more for the same quantity and discontent was growing as people felt that the government was helping the oil companies to surreptitiously make more money. But with the announcement of Karnataka elections, the oil companies froze the hikes.

As soon as the elections got over, however, oil companies started raising the prices with a vengeance, leading to hue and cry as prices hit historical highs even surpassing the peak of the crude oil price boom. And it appeared that the skyrocketing oil prices would be the biggest stumbling block to the NDA government in seeking a return to power. People's frustration over the issue was clearly manifested by the by-election results, nearly all of which went against the ruling alliance.

But as Modi's 'oil luck' would have it, things soon began to turn in his favour once again. With OPEC leader Saudi Arabia brokering a deal with Russia and members of the cartel to turn the tap open for more oil to flow into the market, crude oil prices began to plunge. A move by the OPEC to add one million barrels per day of crude production across the cartel members to stabilise the market actually depressed the market beyond the desired levels. Now there is competition among the producers to retain their respective market shares, which is putting further pressure on prices.

The price collapse of over 40 per cent in the last quarter of 2018 alone has now prompted OPEC and other oil producers to pursue another production cut to buoy the market, but there are uncertainties over how players like Russia would respond to such a move as they need to produce more to keep their economy going. But it will be quite a while before any price stabilisation effort can take hold on the market. That should provide enough elbow room for Modi and his ruling alliance to face the elections without any worry on the price front, although they have enough in their hands by way of other troubles.


(The views expressed are strictly personal)

K Raveendran

K Raveendran

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