Crude oil prices, which soared well past $100 per barrel in the wake of the demand-supply gap and the Russia-Ukraine war, could also fall back faster than the sharp rise. But if it persists, the boiling crude oil may burn a Rs 1 lakh crore hole in the Indian government’s purse, said SBI Ecowrap in a recent research note. Brent crude price scaled a seven-year high of $105.79 per barrel last week. Crude oil prices have risen close to 30% so far this year. The initial rise in prices came on the back of increasing demand, and then more recently the conflict in eastern Europe has made investors fret.
Rs 1 lakh crore dent in government’s pocket?
If global crude oil prices remain elevated and hover around an average of $100 per barrel, inflation will likely increase by 52-65 bps. “Interestingly, petrol and diesel prices have not changed since November 2021. Based on the existing VAT structure and taking Brent crude price of $100-$110 per barrel, diesel and petrol prices should have been higher by Rs 9-14 each as of now,” the note said.
On the other hand, if the government cuts the excise duty on petroleum products by around Rs 7 per litre to prevent rates from rising, then it will incur an excise duty loss of Rs 8,000 crore per month. “And if we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grow around 8-10% in FY23, then the revenue loss of the Government would be around Rs 95,000 crore to Rs 1 lakh crore for FY23,” it added. The government’s full-year budget size is at Rs 39.45 lakh crore.
Crude oil prices may fall fast
“Historical trends (since 2018) indicate that it takes around 18 months for crude prices to crash by as much 67% from the highest level and 30% drop from highest level could even come in less than 3 months,” the note said. This observation leads analysts to conclude that the decline in crude prices from the current high levels could come even faster going by the recent trends. They added that such a fall augurs positive for overall macro prognosis. “Financial markets also recover faster after a geo-political induced decline as the experience of 3 decades reveals,” SBI’s Ecowrap added.
Crude oil prices as of now are already down from seven-year highs hit last week. Brent crude futures were trading at $98.90 per barrel on Tuesday morning, down from $105.79 last week. The impact on India from the war between Russia and Ukraine is seen to be economical and not strategic. While rising commodity prices will impact CAD and domestic inflation, the export outlook of services towards Europe will be impacted negatively.
The average price of the Indian basket of crude oil has risen to $84.67 per barrel in January 2022 from $63.4 per barrel in April 2021, a 33.5% increase. According to SBI Ecowrap’s calculations, every $10 increase in Brent crude price will lead to an increase in inflation by 20- 25 bps.
