As oil output is cut
Wednedsay’s decision will send prices up by $10 per barrel, says Goldman Sachs; next meet on Nov 30
NEWDELHI:BE prepared for a rise in your fuel bills. Members of the Organisation of Petroleum Exporting Countries (OPEC) on Wednesday agreed to cut oil production — a first since economic depression engulfed the world in 2008. As costly fuel pushes up commodity prices, get ready to shell out more on your monthly household budget.
News agencies quoted Goldman Sachs as saying that this crude oil output cut — the oilproducers agreed to cut daily output from 33.24 million barrels to a range of 32.5-33 million barrels — would add $7-$10 to crude oil prices in the first half of next year.
Translated to the Indian context, this would mean an increase of about 10% in the per litre cost of your auto fuel. Currently, a litre of petrol costs ₹64.21 in Delhi and diesel ₹ 52.59. A 10% increase would take it to ₹70 for a litre of petrol and over ₹57 for diesel. Multiply this with your monthly usage and you know by how much your wallet will be lighter.
Every rupee per litre increase in fuel leads to 0.02-0.07% rise in WPI inflation. This means a significant increase in your monthly grocery bill as well, since everything from grocery to vegetables to clothing turns dearer.
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 oil.
The challenge for the government will be to tackle inflation and current account deficit (CAD). Despite two consecutive years of drought, the prevailing low crude prices had helped ease inflation. The downward spiral of crude had also tamed India’s oil import bill from $112 billion in 2014-15 to $64 billion in the last fiscal, which helped the government trim the CAD.
The Union Budget has projected a 3% cut in the Central subsidy bill. And this cut is aided by a 10.2% cut in oil subsidy. This math was done on an average import price of crude oil at $48 per barrel for this financial year.
Brent crude, the international benchmark, was down 25 cents at $48.4 a barrel after hitting a high of $49.09 on Wednesday.
But top sources in finance ministry brush aside apprehensions about the government’s fiscal math. One of the economic advisors to the finance minister said: “We have an elbow room till crude hits $60 per barrel. One spurt does not change the math.”
The only silver lining is that the OPEC decision is only a preliminary understanding. A formal decision will be taken only when the bloc meets in Vienna on November 30 this year. Experts feel it would not be formalised.
“The fundamental differences between the OPEC members will make it difficult for them to honour this informal decision,” said RS Sharma, former chairman and managing director of ONGC.