Global oil prices fall to lowest level in 18 years

Global oil prices slumped to an 18-year low on Monday amid slowing demand and concern that lockdowns imposed to curb the spread of Covid-19 will be extended. In India, petrol and diesel prices have been frozen since March 16, allowing oil refiners to make up for inventory losses and giving the government room to increase levies on the auto fuels by up to Rs.5 per litre to reinforce its war chest against Covid-19, officials and analysts said.

In intra-day trading, benchmark Brent crude price on Monday dropped to $22.58 per barrel, the lowest since November 2002. Later, it recovered marginally and was trading 8.66% down at $22.77 per barrel. The price of West Texas Intermediate (WTI), another benchmark in oil pricing, fell $1.11, or 5.2%, to $20.40 per barrel.

Besides reduced demand because of the coronavirus pandemic, concern over which has been accentuated by worries of extended lockdowns, an oil price war between Saudi Arabia and Russia has contributed to the plunge in the price of crude. For the government, it means a windfall gain, boosted by one hike in excise duty earlier this month, to be followed by one more that’s in the works.

Government officials and company executives said prices of auto fuels in India had been frozen since March 16 to allow petroleum refiners to make up for inventory losses. And the government is considering increasing excise duty on petrol and diesel again to raise additional revenue to fund the battle against Covid-19.

The government raised excise duty on the two fuels by Rs 3 a litre on March 14. A Re 1 per litre increase in excise duty on petrol and diesel would mean an additional Rs 14,500 crore in annual revenue to the government.

Experts said it was prudent for the government to tap the benefits of low oil prices, which will eventually surge again.

“It will circle back to the level of $60-70 [per barrel], hence gains are short-term, and should be used in correcting fiscal imbalance,” said Deepak Mahurkar, a partner and leader of the oil and gas practice at consulting firm PwC India.

Government officials said on condition of anonymity that the finance ministry was keeping a watch on the international oil price movement and could consider raising excise duty on petrol and diesel again.

According to State Bank of India’s latest Ecowrap report, “soft crude prices along with increasing cap on excise will provide additional room of Rs 8 to increase excise duty on both diesel and petrol. After adjusting for the Rs 3 increase, this will result in another Rs 5 increase from the current levels.”

The decline in crude oil price indeed gives some fiscal space to the government as it braces for the economic fallout of Covid-19.

“But there is a double whammy that has hit the downstream sector {oil refiners and marketers}. There are inventory losses and a drop in sales volumes [of petrol and diesel] and collapse in product cracks due to low demand resulting from the lockdowns in response to Covid-19,” said Dilip Khanna, transactions partner (oil and gas) at consulting firm EY, previously known as Ernst and Young .

Executives at state-run oil companies said prices of petrol and diesel had been forzen to make up for losses on other products such as aviation turbine fuel (ATF), demand for which has fallen sharply after the spread of Covid-19.

Prices of petrol and diesel are market-determined and state-run oil marketing companies pair it with their international rates every day. The government deregulated the price of petrol on June 26, 2010 and diesel on October 19, 2014. Three public sector companies --- Indian Oil Corporation (IOC), Bharat Petroleum Corporation ltd (BPCL) and Hindustan petroleum Corporation ltd (HPCL) --dominate India’s fuel retail market.

According to the latest official data, which comes with a lag, India’s average crude oil purchase price (Indian basket) has dropped sharply to Rs 1,805.22 per barrel on Friday compared to Rs 2,272.08 per barrel on March 16, when oil companies had last cut prices of petrol and diesel by 16 paise per litre and 15 paise per litre, respectively.

In Delhi, petrol is currently being sold at Rs 69.59 per litre and diesel at Rs 62.29 a litre.

“Excise duty increase on petrol and diesel is imminent and a final view on its quantum will be taken by the finance ministry,” a government official said.

The finance ministry, the petroleum ministry and state-run oil marketing companies - Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) - did not respond to queries related to fuel price revision and taxation matters.

the expected excise duty hike will not only provide much-needed funds to meet the immediate requirements arising out of the Covid-19 pandemic but also serve as a cushion against any price surge in the volatile international oil market in the future. The government often reduces excise duty on petrol and diesel to protect domestic consumers from any spike in international oil prices.

Central levies on petrol add up to Rs 22.98 per litre and on diesel to Rs 18.83 per litre.

The previous edition of SBI’s Ecowrap had said the government recommended “that the increased excise revenue from oil should not be used for bridging the fiscal gap and pleasing the markets; rather sound economics demands it must be used as a fiscal package for income support to the people working in the unorganized sector who are already facing the brunt of loss of jobs.”

Mahurkar said it is an opportune time for the government to raise prices of petrol and diesel to dissuade people from using polluting fossil fuels. “People should be encouraged to opt for cleaner energy solutions such as gas, solar for industries and batteries for automobiles,” he said.