Gold and Silver may have become cheaper, but Petrol and Diesel prices continue their “New Highs” with another 30 paise hike; Why the rising oil prices may hamper India and Global Recovery?

The Covid -19 pandemics may have taken a backseat for a while as the more in focus is the rising prices of Petrol and Diesel in the country.

On Thursday, the price of Petrol hit a new record high in the national capital as it cost Rs. 86.65, a rise by 35 paise, and Diesel prices were also raised by 35 paise a liter to Rs. 76.83.

However, the residents of Delhi had it better than those in Mumbai as the price of Petrol a liter costs Rs 93.20 and Diesal costs Rs. 83.67 per liter.

But before one can even come to terms with the “new Highs,” hold your breath, for the prices have been hiked this Friday again by 30 paise to Rs. 86.95 liter (Petrol) and Rs. 77.13 per liter (Diesel), in Delhi.

While the Mumbaikars would be left tearful with Rs. 93.49 per liter ( Petrol) and (Diesel) at Rs. 83.99 per liter, according to Indian Oil Corporation. 

This is a second straight hike in the oil prices, even as the cost of both have been rising steadily since January 6, 2021, although it remained unchanged for a month; the fuel prices have been escalating at an alarming rate despite the fact that the consumption has gone down due to the Covid -19 pandemics.

According to Oil marketing companies – Indian Oil Corporation, Bharat Petroleum, and Hindustan Petroleum, the rising prices are due to the need to align domestic fuel prices with global benchmarks by considering any alterations in the foreign exchange rate. 

Is it just in India?

The answer to this is NO; it is just not India facing the rise in fuel price; Global oil prices climbed to their highest levels in a year on Friday. 

The current higher costs of both fuels are boosted by the two factors–

• Continued commitment of producers to hold back crude supply
• Positive signs of economic growth in the United States.

The two significant factors that have boosted the oil prices are – markets are buoyed by stronger than expected orders for U.S. goods in December, a further strengthening of the manufacturing sector, and quick approval of President Joe Biden’s proposal of a $1.9 trillion coronavirus aid plan.

The oil market is also bullish because of China’s demand for crude oil, even as two North Sea crude oil tankers are on their way to China for March 22 and March 24.

Rising Crude Oil could be a worry for the financial markets.

While the fuel cost would be a happy quotient for the oil-producing countries for others, it would be a severe cause of worry. 

Especially in India’s case, the country has been battling with a steady increase in the inflation rate and a spurt in the oil prices, which is not a good sign for India’s fiscal health and financial markets.

Why is this not a good sign for India?

• Because in the current scenario, the current international oil prices may not affect the country’s macro stability, but India still has to manage inflation/fiscal deficit trade-offs as oil prices climb.
• Any rise in fuel prices to offset rising crude oil prices would result in a loss of revenue, a drop in the GDP if we assume that average consumption continues.

Why could the rising prices of Petrol and Diesel hamper India and Global economic recovery?

The rising oil prices are being closely monitored as it can hurt individual and global economic recoveries in the aftermath of the Covid -19 pandemic that led to most economies to shrink last year. 

India imports about 85% of its oil needs and 50 % of its gas demands and is also the world’s third-biggest oil-consuming and importing country. Although India has been trying to reduce its dependence on Middle Eastern producers, it has also been trying to strengthen its relations with the U.S. for imports of liquified natural gas (LNG). It is also the top ten oil suppliers to India.

Global crude oil prices rise to an all-time high in about a year this week as the Organization of the Petroleum Exporting Countries and their allies, which includes Russia, tilted the market balance from surplus to deficit by holding production or production cuts. 

For India, this is a big deal as it has the majority of the baseload continues to be met by oil and gas.

Globally, too the same story is applicable to non-oil-producing countries. For the global economy to thrive, it is essential that the oil-producing countries strike a mutually supportive relationship. It is also in the former’s interest that oil-dependent economies grow, or it would lead to a decline in demand.

What is India doing to offset this dependence?

It has recently been announced that to meet its growing energy needs, India is looking to invest $143 billion in domestic projects; this would lead to a boost in local outputs.

It is also looking got build oil and gas infrastructure, which includes an 80% jump in refining capacity to 9 million barrels per day.

Alternatively, it is also looking to adopt a cleaner energy source in the long term to fuel its economic expansion and reduce the dependence on oil and gas.

Hence, despite the Union Budget receiving a thumbs up from India Inc, the year 2021 could be one of the most challenging years yet for the Indian government, as it is not only the prices of fuel that is rising but also the costs of vegetables (food) and base metals. As the economy further opens up after the slow due to the pandemic, it could witness both demand and supply-side pressures. 

Even though the stock markets have scaled a new high by breaching the 50k mark but once the liquidity becomes tight, the stock markets too will have to correct, and these factors together will begin to weigh heavily on the already fragile Indian economy.