Fuel: High Prices Will Rule In The Medium Term
Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.
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By Sunil Garodia
First publised on 2022-03-09 07:21:02
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Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.
View all posts by this Author
Fuel prices in India remained high throughout the last two years as the cash-strapped government earned huge revenue through high taxes on them. But since the last nearly four months, there has been a freeze on pump prices due to the elections in five states. During this time, even before the war started in Ukraine, the price of Brent crude had increased from $74.17 in December 2021 to $97.13 in February 2022. Yet, pump prices in India have remained unchanged at Rs 95.41 in Delhi, Rs 109.98 in Mumbai, Rs 104.67 in Kolkata and Rs 101.40 in Chennai.
The war in Ukraine has changed all calculations with the price of Brent crude shooting up to $130 per barrel (at the time of writing this article, the Brent crude oil continuous contract price was ruling at $130.92). Although this level is unlikely to prevail for long, there is also the fear that if the war continues for long, prices might shoot up further. With the US banning Russian oil imports and the Russians threatening to turn off gas supply to Europe, the scenario remains grim. High fuel prices for even two or three months will put a lot of pressure on both production budgets of companies and household budgets since inflation will shoot up to dangerous levels.
Oil companies have asked the government for a price hike of Rs 6 per litre to begin with. While this is a realistic figure given the fact pump prices have remained frozen for four months, yet an increase of nearly 5-6 percent at one go is likely to lead to protests and inflationary pressures. That is not all. If Brent continues to remain at inflated levels, oil companies will ask for another hike within 15/20 days and it might also be in the range of Rs 4-6. That would create a lot of pressure on the economy. The government has said that it is exploring all angles, including lowering Central taxes, requesting the states to lower their taxes and asking the oil companies to absorb some losses to ensure that consumers do not suffer much. But it is clear that high pump prices will continue to rule for even if Brent crude prices fall to $90 per barrel, they will be much higher than $74 per barrel in December 2021 when pump prices were last revised in India.
