Oil on the boil

Source: Business Standard

Relevance: Understanding how global crude oil prices impact India

Synopsis: India should gradually move away from an over-reliance on imports for its crude oil and gas requirements. Possible solutions.

Impact of energy demand

Energy prices are likely to stay elevated due to demand from a rapidly recovering global economy, even if the energy exporters agree to an increase in production. This means, pressure on India’s external account (foreign exchange reserves) and higher inflation (due to increased prices of petrol and diesel).

Countering increased demand

This increased demand for energy can not be countered by an associated increase in the supply of crude oil till August. The reason behind this problem is that the Saudis and the UAE have not been able to agree on the methodology for national quota allocation.

Impact on India

India is enduring record retail prices of petrol and diesel. Apart from hikes in retail prices by the oil marketing companies, there are high taxes and duties on petroleum products.

• The states and the Centre combined realized over Rs 6.7 trillion in tax revenues from the petroleum sector in 2020-21. This was higher than the Rs 5.5 trillion realized in 2019-20.

Suggestions/measures

High crude and gas prices invariably put pressure on the trade account, since India imports over 85%  of its crude, and 50% of its gas requirements. Hence, the government should take steps towards the gradual reduction of this over-reliance. Here are possible measures:

• Imposition of duties: High duties, even in times of low global crude oil prices, act as a carbon tax. This creates an incentive to shift away to less environmentally damaging energy sources.
• Capacity building in renewable sources.
• Policymakers should look at ways to ramp up the domestic production of oil and gas
• Encouraging companies such as ONGC Videsh Ltd (OVL) to search for energy sources abroad. Presently, the domestic production of oil and gas has stagnated for five years. Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) have not made any new major discoveries, and existing fields are ageing
• Reducing red tape and simplifying tax structure: Successive auctions under the New Exploration Licensing Policy (NELP) and its successor, the Hydrocarbon Exploration and Licensing Policy (HELP), have met with a lack of enthusiasm.
  • Overseas energy firms claim there is still a daunting amount of red tape to be negotiated before foreign direct investment can enter.
  • In addition to a review and possible simplification of tax and foreign direct investment norms, there is also the need to review the track record of state-run firms like ONGC, OVL, and OIL.
• The upstream energy public sector units must be encouraged and given the necessary resources to improve their track record in exploration and production.
  • Upstream is a term for the stages of the operation in the oil and gas industry that involve exploration and production. Upstream firms deal primarily with the exploration and initial production stages of the oil and gas industry.