The saga of fluctuating oil prices: Every drop is govt’s achievement, hike is blamed on international fluctuations

By Harshmeet Singh

Right before the recent Delhi elections in February this year, the BJP, boosted by its success in the Lok Sabha elections and the state elections of Maharashtra, Haryana and Jharkhand, went all out to list its achievements in huge billboards across the National Capital and national newspapers. Among its 'glowing' achievements was "The Modi Government has been able to reduce the price of petrol by close to Rs 15 per litre!". While the suggested drop in price was actually real, giving its credit to the Indian Government couldn't have been any farther from the reality. For a country like India, which imports close to 75% of its crude oil needs, the prices of petrol and diesel are far beyond its control.

Prices of oil in major oil importing nations depend upon the international oil prices. These international prices, in turn, are mostly dependent upon the demand and supply mechanism. Any change in the equilibrium between the demand and supply, either way, can result in significant alterations in the oil prices across the world.

Then why did the crude oil prices actually drop?

In June 2014, the Brent crude oil was being traded at $115 per barrel. In comparison, the price plummeted to $49 per barrel at the end of January 2015. This sharp drop in price was in stark contrast to the sky rocketing prices since 2010. A number of factors contributed towards the earlier soaring oil prices on the global stage. Countries such as China and India, in order to fuel their growth engines, turned into heavy oil importers, whereas conflict in Iraq meant that the supply of oil in the global market took a major hit. With the demand running higher than the supply, the prices showed a major spike.

Right from 2010 till the mid of 2014, the global oil prices hovered close to $100 per barrel. These high prices forced many companies in the USA and Canada to take up oil exploration in their own countries. The next year saw the major economies in Europe, Asia and the USA slowing down which resulted in weakening demand of oil. A number of newly introduced fuel efficiency features also meant that the demand of oil slowed down and came in line with the supply.

The USA's success in extraction of Shale Gas has also resulted in a sharp increase in the global oil supply. The US produced close to 2.02 trillion cubic feet of shale gas in 2008, which was a 71% increase from 2007. In 2009, the production grew to 3.11 trillion cubic feet. Picture this – Since 2008, the USA has additionally contributed close to 4 million barrels of crude oil every day to the global market.

Although the production in USA boomed in 2008 itself, its impact wasn't visible in the global oil market until recently. This was majorly due to the ongoing civil war in Libya and economic sanctions on Iran. These factors, combined with the threat that Iraq was facing from ISIS, meant that over 3 million barrels of crude was taken out from the market every day.

By the end of 2014, these conflicts and sanctions settled down. This resulted in the global oil supply overhauling the demand comprehensively. China and Germany, Asia's and Europe's most robust economies for a while, also started to slow down. Resultantly, a huge quantity of oil was stored for later use since there were no buyers. This resulted in crumbling prices in September 2014 (co-incidentally, Narendra Modi took over as the Prime Minister at the end of May 2014!).

With the oil prices crashing down, all eyes were on OPEC (Organization of Petroleum Exporting Countries) to see if they would cut their oil production in order to restore the supply and demand equilibrium in the global market. OPEC is responsible for close to 40% of world's oil production. When the OPEC countries met last year in November, they decided not to cut down on their production, hoping that USA would bend down on its shale gas production since the prices are crashing down. The USA, on the other hand, had multiple motives behind not cutting down shale gas production. Saudi Arabia, a dominant OPEC member, was against cutting down the production due to its past experience. In 1980s, during a similar fall in prices, Saudi Arabia decided to cut down on its production, and, in turn, lost a considerable market share. And a rather lesser known fact is that Saudi Arabia, with its $750 billion foreign exchange reserve, is capable of handling a few hiccups in order to beat its opponents.

Moreover, it is a well established fact that extraction of shale gas is a much more expensive process than the extraction of oil in countries like Kuwait and Saudi Arabia. But when it comes to deep pockets, there is hardly anyone capable of competing with the USA.

Why didn't the USA cut down its Shale gas production?

Ever since Russia annexed Crimea from Ukraine, the west, led by the USA, has been at cross-swords with Russia. The USA has also imposed multiple sanctions in order to destabilize the Russian economy. Russia is one of the largest oil producers in the world. Its economy and annual budget, like most of the OPEC nations depend highly on the oil export. The USA, with its booming Shale Gas production is looking to decrease Russia's share in the global oil markets.

Oil and defence are the two main drivers of the Russian economy. Close of 45% of Russia's annual budget is funded by Oil export. With the global oil prices plummeting, Russia turned towards its defence deals to ensure that its already slowing economy doesn't crash. Russia's defence deals with Pakistan, which were highly objected by India, must be seen in this background. With oil prices coming down continuously, Russia isn't left with many other options but to look for new buyers of its defence equipments.

How long would the oil prices stay low?

With motor vehicles becoming more efficient with every passing year and very few economies looking at a boom in the coming years, the demand for oil may not rise extensively for quite a while. But a conflict in one of the oil producing countries can surely create a mismatch between the demand and supply of oil. The future global events would drive the oil prices in the coming years.

What fluctuates the Oil price in India?

Oil prices in India are based on the global prices and the taxes levied by the Central and state Government. Different states levy different taxes on Petrol, which is why the petrol rates are different across the country. Goa is well known for selling the cheapest petrol in India. In 2012, Manohar Parrikar, the erstwhile Goa CM, reduced the VAT on petrol from 22% to just 0.1%! This slashed the price of petrol from Rs 65 per litre to Rs 54.96 per litre. Goa is, in fact, the only state where petrol sells cheaper than diesel.

The Central Government, on the other hand, seeing the global oil prices drop, increased the import duty on crude oil to 7.5% from the existing 2.5% in December last year. Interestingly, this was just 2 months before the Central Government was patting its own back for bringing down the oil prices in India!

Recently, the Government hiked the price of petrol by Rs 3.96 per litre and diesel by Rs 2.37 per litre, citing International fluctuations. It is actually amusing to note that the drop in prices is attributed to the Government's achievement, where as a hike in prices is blamed on international fluctuations!