Oil prices skyrocket; touch US$ 34 per bbl - Views on News from Equitymaster

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Oil prices skyrocket; touch US$ 34 per bbl

Mar 8, 2000

Amidst the view that the OPEC will not loosen its taps in the coming weeks, oil futures touched US$ 34 per barrel in New York the other day. Oil prices are expected to continue their upward journey in the absence of a concrete action by OPEC countries to raise oil production. In FY99 India imported over 35 mt of crude. Between April to December 1999, the crude imports amounted to 37 mt. The sharp rise in imports is mainly due to the commissioning of large refining capacities set up in the private sector. The value of oil imports in FY99 stood at US$ 6.4 bn, while between April to December 1999 the value of imports stood at US$ 6.8 bn. This again is contributed by higher imports and, more importantly, higher crude prices. As a consequence, Indias import bill for FY00 is likely to increase to over US$ 10 bn, a rise of over 55% over the previous year.

The news that crude oil futures are now trading at over US$ 34 per bbl has failed to evoke a response from the government regarding their strategy to combat the situation. Higher crude oil prices will contribute to a higher import bill (larger trade deficit) and a rise in inflation (if the price hike is passed on). Currently, the concern pertains to the deficit in the oil pool account, which reflects the government's subsidy to the consumer. In view of the rise in crude oil prices the oil pool deficit is expected to touch a stupendous Rs 300 bn. How does the government plan to finance this deficit?

The government's relaxed attitude can be attributed to the surge in earnings from software exports and the increased inflows in the form of foreign direct and portfolio investment. These inflows will help quell any danger on the external front. Indeed, the Indian Rupee has been firm in recent months despite the surge in crude prices. However, concerns pertaining to the oil pool account remain unanswered.

It is only a matter of time before petroleum product prices are adjusted to reflect current prices. In the mean time, oil companies will have to bear the brunt in the form of tightening liquidity, as dues from the oil pool account are not redeemed.

The continued surge in crude oil prices has once again highlighted the dismal state of the domestic crude oil sector. To underscore this point, the following statistic may prove helpful crude production dipped 2.8% (YoY) in FY99 and a further 1% in the first nine months of the current year. There is an urgent need to develop the domestic crude oil sector.

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