Why Oil Cannot Be Sold to India in Rupees - Vivek Kaul's Diary
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Why Oil Cannot Be Sold to India in Rupees

Oct 16, 2018

Vivek Kaul

Earlier this month, the central government cut the excise duty on both petrol and diesel by Rs 1.50 per litre. It also announced a price cut of Rs 2.50 per litre on petrol and diesel, with the oil marketing companies taking over the burden of a cut of Rs 1 per litre.

Over and above this, several state governments also cut the rate of sales tax/value added tax on petrol and diesel. Given this, in many states a cut of more than Rs 2.50 per litre was passed on to the end consumer.

Take a look at Table 1, which basically plots the price of petrol on October 4 and 5, in four cities, before and after the excise duty cut.

Table 1: Petrol Prices at the Start of October
Petrol (price per litre in rupees) Delhi Kolkata Mumbai Chennai
October 05, 2018 81.5 83.3 86.97 84.7
October 04, 2018 84 85.8 91.34 87.33
Source: https://www.iocl.com/Product_PreviousPrice/PetrolPreviousPriceDynamic.aspx

What does Table 1 tell us? In Delhi and Kolkata, the price fall was Rs 2.50 per litre, which basically means that the state governments did not carry out any cut on their respective taxes on petrol and diesel.

In Mumbai, the price fell by more than Rs 4 per litre, which basically means that the state government also carried out some cut in its tax on petrol.

Now let's see what has happened to petrol prices 10 days later, on October 15, 2018. Take a look at Table 2, which also plots the price of petrol as on October 15, 2018.

Table 2: Petrol Prices Rise After the Cut
Petrol (price per litre in rupees) Delhi Kolkata Mumbai Chennai
October 15, 2018 82.72 84.54 88.18 85.99
October 05, 2018 81.5 83.3 86.97 84.7
October 04, 2018 84 85.8 91.34 87.33
Source: https://www.iocl.com/Product_PreviousPrice/PetrolPreviousPriceDynamic.aspx

In each of the cities, the price of petrol on October 15, 2018, is higher than it was on October 5, 2018. The same is true for diesel as well. Take a look at Table 3.

Table 3: Diesel Prices Too...
Diesel (price per litre in rupees) Delhi Kolkata Mumbai Chennai
October 15, 2018 75.46 77.31 79.11 79.8
October 05, 2018 72.95 74.8 77.45 77.11
October 04, 2018 75.45 77.3 80.1 79.79
Source: https://www.iocl.com/Product_PreviousPrice/DieselPreviousPriceDynamic.aspx

In case of Diesel, the prices on October 15, 2018, have already crossed the prices on October 5, 2018, in Delhi, Kolkata and Chennai.

The larger point here being that this year India has imported more than 83% of the oil that it consumes. Hence, to that extent it is largely dependent on the oil that it imports. While, the price of Indian basket of crude oil on October 4, 2018, was $85.16 per barrel. In rupee terms it was Rs 6,290.34 per barrel.

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The price on October 15 was $ 79.79 per barrel or Rs 5,902.14 per barrel. There has been a drop of 6.2% in the price of oil, in rupee terms, between October 4 and October 15, 2016. Of course, there is no one to one mapping between the price of oil and the price of oil products like petrol and diesel. One, there is cost and freight to account for as well.

The larger point here being that if India wants some control over petrol and diesel prices, it has to produce more oil of its own. This is clearly one front where India has failed. Also, this is not a short-term solution.


Prime Minister Narendra Modi had a short-term solution in mind yesterday, when he met the CEOs of oil companies and oil experts from all over the world. The press release accompanying the event said: "The gathering included Ministers from Saudi Arabia and UAE, and CEOs and experts from organisations including Saudi ARAMCO, ADNOC, BP, Rosneft, IHS Markit, Pioneer Natural Resources Company, Emerson Electric Company, Tellurian, Mubadala Investment Company, Schlumberger Ltd., Wood Mackenzie, World Bank, International Energy Agency (IEA), NIPFP, Brookings India and various Indian companies involved in both upstream and downstream operations."

What is this short-term solution? In the meeting, The Times of India reports, PM Modi pitched for a rupee payment mechanism. As the press release points out: "Lastly and importantly, he requested [i.e. the prime minister] for review of payment terms so as to provide temporary relief to the local currency."

India has been buying oil from Iran in rupee terms. While this does nothing to control the price of oil, it does have an impact on the value of the rupee. When India buys oil, it needs dollars. Hence, the oil marketing companies sell rupees and buy dollars. In this process, the demand for dollars goes up, and the rupee loses value against the dollar. This has an impact on a lot of other things in the economy.

Hence, the hope is that if India can pay for its oil in terms of rupees, at least that won't impact the value of the rupee against the dollar. In theory, this is a fantastic idea. But anyone who has some understanding of history can tell you that the idea will not work.

The American dollar is at the heart of the global financial system. One of the reasons for this lies in the fact that oil is sold globally in terms of dollars. Most countries do not produce as much oil as they consume. Hence, they need dollars to buy oil. They get these dollars from pricing their exports in terms of dollars?

This gives dollar an exorbitant privilege. While every other country in the world has to earn these dollars, the US can simply print it. If oil sales move away from the dollar, countries around the world will not need as many dollars as they currently do. This can lead to them invoicing their exports in other currencies. Gradually, it can lead to a decline in the exorbitant privilege of the dollar.

The exorbitant privilege of the dollar is one of the major things that keeps the American empire going. In this scenario, if anyone tries to sell oil in a currency other than the dollar. America is not going to sit around doing nothing.

As David Graeber writes in Debt: The First 5,000 Years: "The global status of the dollar is maintained in large part by the fact that it is... the only currency used to buy and sell petroleum, with any attempt by the OPEC countries to begin trading in any currency stubbornly resisted by the OPEC members Saudi Arabia and Kuwait-also US military protectorates. When Saddam Hussein made the bold move of single-handedly switching from the dollar to the euro in 2000, followed by Iran in 2001, this was quickly followed by American bombing and military occupation."

Given this, no country in their right mind will try and price oil in any currency other than the dollar. That would be inviting a lot of trouble. And nobody likes trouble.

Iran is an exception to this. America has applied sanctions on the country which come into effect in early November. I sincerely feel that PM Modi was badly briefed in this case.

Regards,

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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5 Responses to "Why Oil Cannot Be Sold to India in Rupees"

Sahaj

Nov 7, 2018

That is no reason not to trade in Rupee. In fact, we had a long relationship with former USSR and we used to trade only in Rupees. The dependency on US dollars is required to be broken, may be with Euro or Yen or any other currency for strategic reasons. As we saw earlier, during sanctions, USA does not allow payments to be made and can freeze the amount passing through USA for the simple reason that all US dollar transactions are routed through New York. There has to be an alternative route and channel for troubled times.

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S K Wats

Nov 6, 2018

Iran has agreed to sell oil to India in rupees. The U>S govt has not acted adversaly. Any comments.

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Narender kapoor

Nov 6, 2018

India should purchase oil in rupees.

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?????? ??????

Oct 18, 2018

Other than the US, Iran also prints US Dollars.
A congressional report charged Iran with printing and circulating billions of dollars of counterfeit U.S. $100 bills.
According to the report, issued by a panel of Republican House members, the counterfeit bills, described as "nearly perfect," are being circulated with the help of Syria through the international terrorist network and are showing up in Europe, Asia, Africa and the former Soviet republics.

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SUDHAKAR BONTHALA

Oct 16, 2018

Saddam Hussain made elaborate arrangements, even constructed an exchange to transact crude oil in non-USD currency. Even before a single transaction could take place there, USA strategic defence planning team invented the theory of WMD(Weapons of Mass Destruction) in Iraq. History is witness, how even after a decade of US Military operations, not a single WMD was located inside Iraq.

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