Skewed govt policy locks fuel prices at high levels, with no reprieve likely for the common man

Unless the Modi government shows mercy, which is most unlikely, the plight of fuel consumers is set to worsen in the days to come. Already, prices are near all-time highs and going by current indications, the upward movement will continue without any reprieve.

The immediate provocation for the price rise is, of course, the new price momentum in the international market, thanks to the improvement in economic outlook as Covid-19 pandemic is soon expected to be tamed. But it would be a travesty of truth to blame the high price Indian consumers have to pay on a spike in international crude prices.

For, crude prices have risen from their low levels of COVID-19 outbreak, when demand for all kinds of fuel almost dried up. In fact, crude oil prices had hit the low of $19 per barrel in April due to severe restrictions on travel across the world. But for Indian consumers, the current retail price increases are a pick-up from already high levels, because they did not get any benefit from the low international prices due to a skewed policy followed by the government.

Fuel price increases are invariably blamed on rising international prices, but the logic does not apply when prices in the global crude markets fall. It is a highly doctored free market that Indians have been presented with. For, the government does not want Indian consumers to get used to paying low petroleum prices, so every time there is a fall, the government hikes the taxes so as to neutralise the price fall and lock the price at their high levels.

For the government, fuel is a valuable resource to make money, irrespective of how efficiently such money is spent. So, every price decline is an opportunity to make more money. For instance, the current retail prices in India are nearly the same when crude prices were at around $80 per barrel, which was the prevailing price in October 2018. Today, crude prices, despite their recent increases, are only at half that level, but the Indian consumers are paying the same price that they were paying when crude price was nearly double of what it is today.

The logic is simple and straight forward. Crude prices account for only a third of the retail prices, while two parts are on account of taxes, commissions and profit for all stakeholders, except consumers. That is why, despite the so-called free market in operation, Indians do not benefit from any decline in international oil prices.

With post-COVID-19 optimism catching on, international prices have started reflecting the positive sentiment, which is set to gain further ground in the days to come. Optimism over COVID-19 vaccines has already taken the market on a wild ride, with prices hitting the highest weekly close since the outbreak of the pandemic in March 2019, and breaching the psychological threshold of $50 per barrel.

Oil market experts see the vaccine optimism already leading to a side-effect in the market in the form of what they describe as ‘acute hyperopia’, as they feel that the current market completely ignores the fragility it is still in for the short-term, as traders have decided to look to future and focus on the eventual ‘back-to-normal’ once the vaccines are deployed.

They feel that although optimism is certainly justified as the vaccine has removed uncertainty for the market in the mid-term, the short-term crude demand remains anything but given as winter is fast-approaching and governments warn of a third wave of cases in the northern hemisphere, while th4e world is still handling the consequences of the second-wave.

If there is a third wave, the risk for which is heightening in view of the Christmas period ahead, with some easing of lockdowns, wherever they are in force, and the start of festivities, the conditions would turn ideal for a new spike in infection to take place. But there is a consolation that the trouble mostly lies in the Western hemisphere.

The global oil demand recovery is continuing in two different speeds. Asia appears to be a far better place for the commodity than the rest of the world. In fact, OPEC+ is counting on Asia to drive the globe out of the economic and oil consumption slump, and the continent is still on par to reach pre-virus demand levels by the summer of 2021.