11 Jul 2017 19:36 IST

Oil continues to be a boon for the Centre

Its effects have embellished the government’s accomplishments

A year-and-a-half ago, I had observed that low global oil prices had been a tremendous boon to India — and the Indian government — saving the nation an equivalent of $70 billion each year. These funds have been spent on other government priorities, and because oil can only be bought and sold in dollars, the savings have bolstered our foreign exchange reserves, keeping the rupee strong.

And 18 months later, the situation is nearly identical to what it was in December 2015, even though oil prices have slightly risen since then.

Price volatility

Regardless of nationalist election victories in Britain, and the US steering trade away from globalisation, the oil market has never been more globalised. A quintessential commodity, its prices are heavily dependent on global supply and demand. At the margins, the slightest lift in supplies or a drop in consumption can dramatically swing oil’s prices. In fact, these don’t even have to be physical changes in quantities — just a threat of a change can affect the price.

Demand

Let’s look at the demand side of the equation. Last week, The New York Times reported that Volvo, the big Swedish car brand owned by the Chinese company Geely, will no longer make cars running on the venerable internal combustion engine in just a few years’ time. It will only manufacture electrics and hybrids, a move which will mean there will be one million fewer new cars running on gasoline, starting 2019. Neighbour Norway has already announced that it will only allow electric cars beginning 2025.

Tesla is ready to release its S3 electric car in the US. With a range of 215 miles on each charge and a suggested retail price of $35,000 (government tax incentives will subsidise this even further), electric cars can finally compete with traditional cars in the second biggest automotive market in the world. It is no wonder that Tesla’s market value exceeds that of — or is close to — the big brands such as GM, Ford and Chrysler, although Tesla produces fewer cars.

The domestic side

In India too, there is a lot of anecdotal evidence to show that petrol consumption is beginning to stall. Use of ride-sharing services from Uber and Ola has cut the number of cars on the street in the big cities. With the introduction of metros in major cities such as Chennai, Bengaluru and Kochi, reduced travel times are acting as powerful incentives for people to use these gleaming new trains instead of getting stuck in automobile traffic. For its part, India too has announced ambitious plans to outlaw gasoline and diesel cars beginning 2030, although, the roadmap is unclear.

Supply

On the supply side of the equation, meanwhile, the oil glut continues. News reports suggest that Libyan crude, loved by the world’s refiners for its high quality, is flowing into world markets at a rate of nearly one million barrels a day! The country doesn’t have a functioning government but strange agreements between rival fighting factions have secured this export.

With ISIS ceding territory in Iraq and the joint US-Russian onslaught on ISIS in Syria, there are now reports that Syrian oil may well re-enter the world’s oil supplies. Russia has already begun awarding private contractors a commission on Syrian oil sales if they take over oil assets, protect them and begin to produce the commodity.

US President Trump has signed executive orders easing rules regarding oil production in the Gulf of Mexico and the Alaskan slopes. And with shale oil producers being able to produce profitably even if oil goes below $30 a barrel, all recent OPEC moves to contain production have only meant that the nations of the cartel are losing out on sales, while non-OPEC countries are happy to fill orders. Today, Texas oil ports, which were recently built to process oil imports from Liquified Natural Gas (LNG), are doing the exact opposite — exporting oil because of a recent change in the law.

The discrepancy

These low oil prices have been a welcome gift to millions of drivers around the world. In the US, the price for a gallon of gasoline in Dallas dropped to $1.75 — about ₹29 a litre after central and state local taxes. Economists of the country estimate that American consumers have saved nearly $1,200 a year in their fuel bills as a result of falling oil prices, spending it instead on other things that are keeping the American economy vibrant and strong.

But the Indian government doesn’t seem to believe that drivers can use the savings better, arguing that it knows how to spend the money better. Each time the price of oil falls, the incumbent government announces an excise duty hike to keep the price at the pump nearly the same, or just slightly lower.

Each increase brings thousands of crores of additional tax revenue to the exchequer. This is why the petrol price in Delhi is about ₹63 a litre. The ₹34 difference with the US price is all consumed by taxes and fees, adding valuable revenue to the government.

Trust and charisma

Trust in the central government, largely because of its charismatic leader, Modi, is so high that it is unfashionable to question the government’s tax and spend policies. We now seem to implicitly agree that the government knows best — and that good intent trumps everything else, including poor policy.

As I noted a year-and-a-half ago, oil has been a huge unintended windfall for the Modi government — so big that its effects have embellished the government’s accomplishments and masked its failures. And the way things are looking, this situation will likely continue for the foreseeable future.