THE YEAR IN REVIEW Rising crude price due to OPEC production cut doesn’t bode well for India, may increase inflation, deficit

NEW DELHI: Oil has been on the boil in 2016. From being $26 per barrel in February, oil price rose to $50 in December.

As the Organisation of the Petroleum Exporting Countries (OPEC) has decided to cut production by nearly 1.8 million barrels per day, oil prices are likely to stay above $50 in 2017.

Analysing the Saudi Arabia-led OPEC decision and Russia’s keenness to cut oil production, the International Energy Agency (IEA) assumes the decision will cause the supply to go down in the first half of 2017. Simply put, this means oil prices will zoom, which does not bode well for the Indian economy.

India, which depends on imports to meet 80% of its oil needs, will have to spend ₹9,126 crore more every year for every one dollar per barrel increase in crude prices.

The challenge for the government will be to tackle inflation and the current account deficit (CAD). Despite two previous years of drought, low crude prices had helped keep inflation low.

The downward spiral of crude since the end of 2014 had also reduced India’s oil import bill from $112 billion in 2014-15 to $64 billion in the last fiscal. This in turn helped the government trim CAD.

The Union Budget 2016 had projected a 3% cut in the subsidy bill. And this cut was aided by a 10.2% cut in oil subsidy. The calculation was done, assuming an average import price of crude at $48 per barrel for this financial year.

Reportedly, Budget 2017 India’s crude oil imports in 2015-16, 6.7% up from 189.4 million tonnes in the previous year. The bill for this, however, nearly halved from $112.7 billion to just $64.4 billion in 2015-16

will assume an average crude price of $55-$60 per barrel. But the fiscal math will go awry if the IEA’s prediction comes true.

One of the economic advisers to the finance minister said: “We have elbow room till crude hits $60 per barrel. One spurt does not change the math.”

An increase in global crude prices would mean a subsequent increase in petrol and diesel prices in India. A direct impact on your fuel bill!

“With the production cut, we expect the price of petrol to rise 5-8% and that of diesel by 6-8% over the next 3-4 months. Rising crude prices also means the profitability of public sector refiners would

improve in the third quarter of the current fiscal driven by inventory gains,” said Rahul Prithiani, director, CRISIL Research.

It is not just an increase of your fuel bills, but every rupee per litre increase in fuel leads to 0.02-0.07% rise in Wholesale Price Inflation (WPI). This means a significant increase in your monthly grocery bill as well.

The only hope for India is that OPEC’s track record in sticking to production cut resolutions is poor.

Since 1989, OPEC has negotiated many such cuts but seldom stuck to them. But experts point out that this time it could be different.

“Let’s see if OPEC manages to stick to its commitments. But chances of it sticking to the resolution is higher this time, given the economic situation of these countries,” said RS Sharma, former CMD of ONGC.

Russia, a non-OPEC country, supporting the OPEC move and also agreeing to a production cut, increases the chances of this commitment being met.

Experts also point out the tough economic conditions in the oil exporting countries and that major importing countries like China are yet to fully recover.

Keeping these conditions in mind, OPEC could change their bad track record this time.