With Russia following suit with Saudi Arabia and announcing that it will also cut oil production, the big question is how much this will mean for India’s oil import bill. And essentially, whether the average Indian is looking at a likely increase in petrol and diesel prices, with its domino effect of price rise in essential items.
India imports as much as 85% of its petroleum requirement from abroad, and any price increase due to a cut in production by two of the biggest producers could have repercussions.
OPEC, the organisation of petroleum exporting countries, had tried to shore up falling oil prices over the past year by some cuts, finally announcing at its meeting last month that further production cuts will come into effect only next year. But then the Saudis decided to break loose
Ironically, while the world had braced itself at the Saudi announcement of reducing its production by 10 lakh barrels per day from July 1, it is perhaps Russia’s follow-up the other day that it will also cut production, by 5 lakh barrels a day, that could end up with a bigger impact.
This is because since Russia’s invasion of Ukraine and the west’s sanctions on it, Russian oil had been flowing in cheaply instead to India — as per official figures in May, over 40% of India’s oil imports came from Russia. And why not, when it was coming at just 500 dollars a tonne of oil, compared to 637 dollars a tonne for oil from Saudi Arabia, according to Indian government data.
“Even as India has managed to diversify and source a major portion of its oil from Russia and at decent rates, Saudi Arabia remains a major import partner. So, if the output cut results in reduction of supplies to India, it would likely lead to higher costs of refining in the country, thereby leading to higher petrol and diesel prices for consumers,” said Suyash Gupta, director general of the Indian Auto LPG Coalition.
Especially since retail fuel prices in India have not been increased for over a year even as oil rates over the past several months went sluggish as inflation reduced demand for the fossil fuel in many parts of the west. This had started just about helping India’s oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum turn a profit in recent months after cycles of losses.
Saudi Arabia has been talking of oil cuts for some time now in a bid to shore up prices that have fallen since the highs of 123 dollars per barrel a fortnight after the Ukraine war started, back in February-March 2022.
Since then, increase in interest rates, rise in prices and overall mood of an impending recession in western economies had reduced commercial activity so much that demand for oil had dropped, leading to a drop in prices. Brent crude oil which had dropped to 80 dollars per barrel at the end of 2022 (from the highs of 123) was last month trading as low as 73 dollars.
The saving grace, at least for the ordinary Indian, is that the impact of Saudi cut which has come into effect, has been minimal on international oil prices so far — though Brent crude oil price went up by 1.60 dollars on Tuesday, it had dropped to 76.11 dollars by Wednesday morning India time.
And perhaps more importantly, the Russian cut will not come into effect until August, and even if it leads to an increased cost, prices are likely to be kept on hold considering that crucial assembly elections for states like Madhya Pradesh and Rajasthan are coming up by November/December.
“For the government, one option is to give an immediate policy thrust to alternative and cleaner options as part of its broader mobility policy…it would address both cost and environmental issues,” added Gupta.