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Crude concerns deepen as crude skyrockets - Views on News from Equitymaster
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  • Nov 19, 1999

    Crude concerns deepen as crude skyrockets

    The rocketing crude oil prices have been a cause for worry for sometime now. The worry has been amplified with the Opec having reiterated in a recently held meeting that the production cuts will be in place atleast till April 2000. What is worse is that demand in the northern hemisphere is on the rise as the winter set in. The oil pundits are already talking about US$ 30 per barrel.

    During FY99, India imported crude oil and other petroleum products (POL) worth US$ 6.4 bn. This was when the crude prices were at ridiculously low levels of under US$ 10 per barrel. Since then however, the picture has dramatically altered. POL imports during the first five months of the current fiscal are in excess of US$ 3.8 bn. What is worse is that since August prices have risen further. India, which does not permit hedging in oil futures, has been one of the major losers of this surge in prices.

    India's problems have been compounded by a declining output of domestic crude. Domestic production declined by 3.1% during FY99 and has grown by just 1% during the first half of the current year. The continued sub optimal performance of the domestic crude oil sector has led the government to permit private sector participation. Although, private companies have already become operational, a significant jump in domestic crude production is still some time away.

    source CMIE

    In order to reduce the impact on the fiscal deficit, the government is considering a plan to reduce subsidies on petroleum products. As a percent of the targeted fiscal deficit, LPG and kerosene subsidies amount to 11.4%. The deficit of the oil pool account is estimated to be in the region of Rs 48 bn (4.5% of the targeted fiscal deficit) for the current year. A cut in subsidies could thus reduce the burden on the fiscal deficit.

    In order to reduce the burden on domestic consumers, the government has suggested that oil import duties may be reduced in order to lower domestic costs of production. These benefits could then be passed onto the consumers in the form of lower prices.

    However, in this case the burden would only shift from the retail consumers to the central government. This is so because as custom duty realisations drop, the government would be faced with an even larger revenue shortfall (implying a larger fiscal deficit). This would have to be made up by raising more revenues (higher taxes) or reducing expenditure.

    The oil sector has been the undoing of many a government in India. However, the incumbent government has shown the will and the desire to go ahead with oil sector reforms. The problem arising from the sharp jump in crude prices will have to be borne by us. At the same time we must take steps to avoid being caught in the wrong position in the future…again.



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