Understanding the spiraling petrol prices

Disclaimer 1: This article was written by me for a Business and Economy magazine and since it was written a month ago, some things might have become a little redundant. 

Much has been debated upon the recent rise in petrol prices all over the country and while the causes are being attributed to the internal and/or external economic variables, ultimately it is the common man’s suffering. He does not understand the reasons which news channels quote, nor the analysis that newspapers offer forget watching Bloomberg or ET now to track the situation and try to rationalize this.

This, on part of government is a huge PR failure that people do not understand what is going on in the economy but this is matter of another discussion altogether. With my own research, consultation with the economic czars and further digging under the newspaper articles, I present here in common language the different reasons why the economy is plunging more and more into slowdown and why the inflationary trends never seem to leave the essential commodities like petrol.
This can be started with taking two variables that directly affect the petrol pricing. First one is Brent crude pricing because it is the most general indicator of petrol price trends across the world and the other is dollar prices because India is a heavy fuel importer.

The dollar prices have touched their all-time intraday high level of rs56.52 per dollar just a few days ago and this adds to the problems for the country.

The prime reason behind the free fall of Rupee against Dollar can be attributed to the Eurozone crisis which has resulted in loss of investor sentiments and a search of safe havens by investors, unlikely to fall in emerging economies like India.

But, attribution to the single factor doesn’t gives us the complete picture and in my perspective it is more due to the logjam created through current account and fiscal deficits.
The fiscal deficit for the year 2011-2012 stood at Rs5, 21,980 and it is targeted at Rs5, 13,590crores for the 2012-2013. This deficit makes the borrowing necessary, which in turn raises the interest burden for the government and the most of the budget allocation goes to this ‘planned expenditure’. The oil subsidy is one of the major constituents of the deficit and according to a team of financial analysts, “The oil subsidy for the year 2012-2013 is estimated to be Rs43, 580crores. But we project the losses suffered by OMCs for the current year, this subsidy will come out to be Rs1, 14,000crores.”

Current account deficit is increasing on daily basis and additional burden is falling on government to arrest this falling trend so that importers can be protected from the havoc. It can be quantified in view of the fuel prices as:

“Every one rupee fall in the value of the Indian currency against the dollar requires an increase of 0.77 rupees/liter in the retail price of gasoline, while every dollar decline in delivered prices of Singapore gasoline means prices need to go up by 0.34 rupees. “
The oil marketing companies have lost around Rs. 4300Crores for selling petrol below the cost in the last six months.

The other variable in this context is the Brent crude prices. Brent crude oil is a specific type of oil which is generally lighter and called ‘sweet crude’ because of low sulfur content.

North Sea Bbrent crude was discovered in the early 1960s. It is now sourced primarily by the United Kingdom, Norway, Denmark, the Netherlands and Germany. Brent crude oil is not as light or as sweet as its counterpart, West Texas Intermediate oil.

If recent macroeconomic trends are something to go by, Brent crude prices have been falling continuously and a stage has been reached where supply outpaces demand. This has been possible due to new efficient drillingtechniques, discovery of new oil fields and other measures to cater the ever increasing demand.

But these falling prices, too fail to lower the price of crude oil in the country. It seems incomprehensibleat first but the trend is directly related to dollar prices which are on all time high and thus, nullifyingall the lowering in Brent crude barrel prices.

Thus, the onus of the petrol prices comes to the government policies finally. Careful circumspection and observation reveals that not only the government is failing at taming the global pressures well and this is ultimately resulting in national economic turmoil. Problems like large current account deficit, drying up of capital inflows, political logjam and the constant danger of the economy slipping into double dip.

This is another harm of being in a democratic state like India which runs on coalition government and hence a measure like lower taxes on petrol all over the country is a far sighted dream but once executed, it can prove to be a worthwhile step which can arrest both, inflation and free fall of Rupee.

Noted economists like our very own P.M and F.M are working day in and day out to bring the economy back on track but with the IIP growth coming to a halt, it seems highly doubtful in the near future.

The need of the hour is to stop non plan expenditure and introduce not just one but a series of robust steps and initiatives which open up the Indian economy to foreign investors, companies and governments and the concept of liberalization can finally be implemented.

Growth of the industry can primarily be the factor of utmost importance in the GDP growth and hence more measures like 49% FDI are also necessary to emerge from the finance minister’s table.

But, there are a lot of game plays in this so called ‘policy paralyses’. The United Progressive Alliance government in its second term has already suffered a huge setback in terms of recent state elections and the pressure mounted up by the parties in opposition and coalition just doesn’t seems to be easing any sooner.

Hence, government is finding itself in a fix to whether play for the chair or play with it. In other words, a bold economic policy will bring the country back on track but a well spread public loathe is on the cards which can even result in premature elections that are due in 2014. Moreover, saving the chair cannot serve too well in the long term either.

Hence, it is fight for not just the government but for every one of us to choose, at our own levels between what’s right to do and what’s right for us.

Disclaimer 2: A price rise of Rs.5 is coming your way the next week! Fuel up. 🙂 



About Mayank Jain

@Mayank1029 on twitter.

Posted on September 8, 2012, in Not so quick thoughts and tagged , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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