CRUDE OIL: Rising Prices to Put More Pressure on Economy

The cost of imported crude has been steadily going up of late, touching a historic high of . 6,186.8 per barrel this month. Both rising global crude prices and a falling rupee have contributed to the spike in import costs. Add to this the oil industry’s daily losses of over . 465 crore since the beginning of February, it is bad news for the country’s economy.
In December 2011, when the rupee stood at around 53 to the dollar and crude traded at $110, India’s oil import costs exceeded the previous high set in July 2008. The rupee’s steady recovery in 2012 was expected to ease the problem, but oil prices continued to rise, gradually crossing the $125 per barrel mark — nearly a three-and-a-half-year high — on tensions in Iran, Syria and Sudan.
On the other hand, the rupee, that had recovered to 48.6 against the dollar in February, again started weakening, breaching the 50 mark recently. As a result, the price India pays for its crude oil imports consistently stayed above . 6,100 per barrel in March 2012 — a historic high. Considering that India imports three-fourths of its oil requirement and retail fuel prices remain heavily subsidised, this is indeed bad news. According to the petroleum ministry, the daily losses of three state-owned oil marketing companies (OMCs) have exceeded . 465 crore since the start of February. This is 70% higher than the losses in October 2011.
Assuming that the industry’s losses from the first half of March 2012 remain unchanged in the second half as well, its total under-recoveries for the January-March quarter could be . 40,200 crore. This will take the country’s total under-recoveries for FY12 to close to . 138,000 crore.
Unfortunately, this data only reflects the industry’s losses on diesel, kerosene and LPG, and ignores the losses on petrol, which the OMCs have been selling below cost due to elections in five states. The industry is currently losing . 12.04 per litre on diesel, . 28.54 per litre on kerosene and . 439 per LPG cylinder, apart from . 5.1 per litre on petrol.
At a time when economists all over the world are imagining scenarios where oil prices could top $150 per barrel and ratings firm S&P warning India on a credit downgrade for fiscal profligacy, this doesn’t bode well. Increasing retail fuel prices are not only politically unpalatable, but also can stoke inflation making it difficult for RBI to reduce rates.
And any indication that the rate cycle would take time to reverse is likely to make equity markets nervous, prompting FIIs to sell and weakening the rupee further. As the finance minister presents Budget 2012-13 later this week, he will face a tough task managing all these variables while dealing with fuel subsidies.