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Fuel Economy & the Hard Facts

WebdeskMar 14, 2021, 12:55 PM IST

Fuel Economy & the Hard Facts

Global Oil prices crossed $70 per barrel a few days back but soon thereafter lost ground and settled in the range of $66--68 per barrel. However, by March 13, 2021, as tight supplies forced a global drain in inventories, Oil surged above $69 per barrel, driven by aggressive vaccine programs worldwide and the resumption of economic activities. Interestingly, OPEC downgraded its demand forecast for the next two quarters, owing to ongoing lockdown measures, voluntary social distancing and other pandemic-related developments. Despite the fall in demand forecast, Saudi Arabia's decision to voluntarily cut its output by 1 million barrels per day, has kept prices elevated. Whether Oil sustains at the current elevated levels will depend on whether U.S. shale drillers who promised restraint, will hold back or restart drilling, now that prices have risen to such attractive levels.   Goldman Sachs, recently predicted that the global Oil benchmark, that is Brent Crude Oil, will sustain at $70 and more. Those gains will be driven by long-dated prices and steep backwardation, which happens when futures prices are below spot prices. “We now forecast that oil prices will rally sooner and higher, driven by lower expected inventories and higher marginal costs, at least in the short run, to restart upstream activity,” said the team, Damien Courvalin, Callum Bruce, Jeffrey Currie and Huan Wei, at Goldman. "We further believe that this additional rally will be supported by the current repositioning for a reflationary environment with investors turning to Oil, buying a lagging real asset that benefits from a stimulus-driven recovery and has demonstrated an unmatched ability to hedge against inflation shocks,” the team added.   Hopes of economic recovery from the pandemic, driven by rollouts of Covid vaccines, have been pushing investors out of the perceived safe haven of bonds and into commodities and other assets. The yield on the 10-year US Treasury note, after hitting a low of 0.32% last year, crossed 1.61% recently. As for the fundamental reasons supporting elevated global Oil prices,a better than expected demand and still depressed supply, creating a much larger deficit than the deficit of 2.3 lakh barrels per day, seen in December 2020, are the key factors, pushing up oil prices, with even OPEC now estimating global GDP growth at 4.8%, versus the earlier estimate of 4.4%. The oil deficit will likely widen as not even ramped up OPEC+ production (Organization of the Petroleum Exporting Countries and other producers such as Russia) can keep up with the ongoing demand recovery that is underway. Also, it will take a while for recovery in Iran’s exports. As for vaccinations and warm weather drive jet fuel demand, overall global demand is expected to reach pre-pandemic levels of 100 million barrels a day by late July 2021, as per Goldman, with the supply deficit rising to 900,000 bpd during the first half of 2021.   The recent bull rally in global oil prices, therefore, from a low of $18 a barrel in April 2020 to a high of over $70 in March 2021, effectively means, Crude Oil prices have risen by an unbelievable 289% in the last 11 months, with a good 30% plus of that rise coming in the last one month alone and a solid over 60% of that rise, coming in the last three months. Since more than 80% of India's Oil demand is met via imports, any surge in global Brent Crude price, obviously has a sizeable impact on India too, as both Petrol and Diesel are now fully deregulated.   According to the US Energy Information Administration (EIA), India is currently ranked behind the United States and China as the world's third-largest oil consumer. It consumed 206.2 million tonnes in 2017-18. Oil cartel OPEC projected India's oil demand to rise by 5.8 million barrels per day (bpd) by 2040, accounting for about 40% of the overall increase in global demand during the said period. As per EIA, India is set to replace China as the 100 pound Oil guzzling behemoth, in the next few years. Since in the final analysis, the price of any commodity including Oil, is driven by demand and supply dynamics, each time Petrol or Diesel prices rise in India, we should ask ourselves, have we done enough to contribute to greener fuels? Maruti Suzuki, for instance, sells over 1.6 lakh units every month, on average, which means, it is selling about four cars every minute! Overall Car sales, for example, rose by a healthy 16% in February 2021, over the same month last year. Clearly, despite the brouhaha, Oil demand continues to gallop away, outpacing supply, also reflected in rising auto sales.   Factors leading to the global bull rally in Oil were the $1.9-trillion stimulus package by President Joe Biden, Biden’s moratorium on federal land drilling, the revocation of the permit for Keystone XL and the moratorium on all oil and gas leasing in the Arctic National Wildlife Refuge, are the key factors driving the recent surge in Crude Oil prices. A slow increase in non-OPEC supply, rising winter demand, snowstorm in Texas, depleting global inventories and Corona induced supply disruptions, will in turn, further, push up global oil prices.   Speaking specifically of the recent Brent Crude price rise,well,that has been in the making since May 2020,driven primarily by factors like output cuts to the tune of about 9.7 million barrels per day in May, June and July last year,by Saudi Arabia led Opec,drilling by US shale oil wells falling to 2 year lows of barely 7.63 million barrels per day,output cuts to the tune of 7.7 million barrels per day between August and December 2020 by Opec and ofcourse,demand recovery in China.   Recently,India called on OPEC+ to increase production in order to dampen crude prices. India’s Oil minister Dharmendra Pradhan said India would look to diversify away from the Middle East as a key source of supply.Biden administration has also begun to approve drilling permits. After an initial pause, the U.S. Interior Department approved 200 drilling permits in the past few weeks, mostly in Wyoming and North Dakota. While leases on federal lands have been temporarily suspended, approval of drilling permits appears to be resuming. Hence,among other things,global Oil prices would also be dictated by what Biden chooses to do,going forward.   Theoretically,every $1/barrel fall or rise in Brent Crude price, leads to a 0.45/litre reduction or rise in product prices,assuming "other things" are constant. However, other things like the rupee-dollar exchange rate, cess,refining cost, import duties,shipping charges, freight rates and dealer commissions & profit margins,are never quite constant in the dynamic,real world. India's ignorant opposition has often alleged that under the inept,Congress led UPA-2, despite elevated Brent prices globally, local fuel prices were much lower. Well,that is because,fuel prices were only partially decontrolled under the inefficient, Congress- led United Progressive Alliance (UPA-2) government, with Petrol prices being deregulated only in June 2010. It was Prime Minister Narendra Modi-led NDA government that took the unpopular but bold and long overdue decision of decontrolling Diesel prices too,in October 2014.   Hence,comparing fuel price movements under the Modi government,with the erstwhile,lethargic,Congress regime, is unfair and unacceptable.Also,don't forget that,the previous,Congress led UPA government took loans by purchasing Oil bonds of Rs 1.44 lakh crore,that the Narendra Modi led,NDA government inherited and paid for. Not only this,the Modi government also paid Rs 70,000 crore on the interest part alone,which means,in total,the Modi government discharged debt obligations of the earlier Congress regime, by repaying over Rs 2 lakh crore.A father who leaves behind property for his next generations is seen with respect in the society but what one would say about the father who takes loans and turns bankrupt and thereafter,leaves the baggage for his generations to come?An inept Congress played the role of the reckless, prodigal father,in this case.   To nail the misinformation surrounding domestic fuel pricing,it is best to look at this real time,example--Petrol prices in Mumbai few weeks back hit Rs 100 per litre.Of this Rs 100,the Basic rate is Rs 32.97 per litre; Central government tax is Rs 21.58;State government VAT,surcharges and levies are Rs 41.67,per litre;Distributor margins work out to Rs 3.78,per litre. Clearly,it is not the Central government, but State government taxes that are the biggest component of Petrol prices and also the biggest reason,for the steep rise in domestic fuel prices. Effectively speaking,State government taxes account for 41.67% of the final Petrol price,whereas Central government taxes account for only 21.58% of the final Petrol price,per litre. Hence,before pointing fingers at the Modi government, opposition leaders like a clueless Rahul Gandhi,whose party,the Congress,is a vital part of the ruling alliance in Maharashtra, would do well to do some number crunching!In fact,along with VAT,disaster management cess and highway liquor ban cess,the net share of State taxes in fuel prices,in Maharashtra is almost 50% and ditto is the case with Rajasthan,another Congress ruled State,with the highest VAT.   Also,do not forget,that while under an incompetent, Congress led UPA,Oil prices were deliberately kept low,it did more harm than good,because the subsidised fuel meant higher fiscal deficit,which in turn manifested itself in higher retail inflation. So seemingly low fuel prices under the erstwhile Congress dispensation,were simply a chimera and a charade. People may have paid lower prices for fuel then,but paid many times more for day to day food and grocery items,in 2013, when retail inflation crossed 12% and food inflation crossed 14%,under a clueless Congress led UPA. Under Prime Minister Narendra Modi's astute leadership,average retail inflation has been barely 3.9% between October 2016 and March 2020.By and large,the Modi government has won the war against inflation,decisively,on many counts.   Again,it is nothing but sheer hypocrisy to talk of rising Petrol and Diesel prices but not give the Modi government credit for the fact that compared to 2013,when LPG gas cylinder prices went to as high as Rs 1270 per cylinder,today a LPG gas cylinder costs Rs 769 and in January 2021,it was even lower at Rs 694 per cylinder.Do note that globally,LPG prices in the last few months have risen from $455 per tonne,to over $600 per tonne, which is a 32% increase.Locally,in India, compared to 2013,LPG prices in the last 6.5 years,under the Modi government,have actually fallen by anywhere between a good 40-83% !   To cut to the chase,India,under Prime Minister Narendra Modi, is planning to increase natural gas consumption by 2.5x, as part of the energy mix,to 15.5% by 2030, from the current level of 6.2%. The ongoing transition from an "Oil economy", to a "Gas economy",under PM Modi's visionary leadership,is steadfastly underway.Over 70% of India’s population in over 400 districts will have city gas distribution (CGD) facility, soon.Only 25 lakh households in India had access to piped natural gas (PNG) in 2014 but thanks to the Modi government’s persistent efforts, that figure more than quadrupled by 2021.Again,India only had 947 CNG stations in 2014,that number rose to 1470 stations in 2018 and is set to scale up to a massive 10,000 CNG stations in the next few years.Since CNG is anywhere between 45-60% cheaper compared to Petrol and Diesel,this will make India self reliant,in more ways than one.   India,under Prime Minister Narendra Modi, has the enviable accomplishment and unique distinction of already vaccinating over 11 million people,in what is clearly the world's fastest and most ambitious vaccination drive,with India even exporting vaccines to over 21 countries.The Union Budget for 2021-22 set aside Rs 35,000 crore for the Covid vaccine.Allocation of Rs Rs 2.23 lakh crore for health,is a 137% jump in 2021-22, over 2020-21. Rs 1.18 lakh crore for road infrastructure, Rs 1.10 lakh crore for railways,an outlay of Rs 3.6 lakh crore for the power sector and Rs 16.5 lakh crore towards agriculture credit outlay in the Union Budget, showcase how the Modi government is spending money judiciously,towards a healthier,fitter and better India.Defence allocation at Rs 4.78 lakh crore,which is up 19% in FY22,over FY21,is aimed at a more safer and secure India.   It is an unpopular opinion but let truth be told--taxes are crucial for resource mobilisation by the government, to fast track development. And yes,this is true for India and ofcourse,governments, world over,too. Also,don't forget,as per the 15th Finance Commission's recommendations, 41% from the Central government's divisible pool of taxes,goes to States.The Goods and Services Tax (GST) has been touted as the most significant and bold indirect tax reform ever,by Prime Minister Narendra Modi, in post independent India.The GST seeks to rationalise and remove the cascading effect of indirect taxes,by subsuming a host of indirect taxes such as VAT, excise duty and entry tax. The GST Council has two-third representation from the States and only one third from the Centre.Hence,rather than politicising fuel price hikes and conveniently blaming the Modi government,States like Rajasthan and Maharashtra,where fuel prices are amongst the highest and where the Congress is in power or in alliance,need to answer,are they ready for fuel prices to be brought under GST?As they say, "you cannot have your cake and eat it too"!!


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