Soaring Crude Oil price and its impact on India

With the crude oil touching $100 per barrel in the very first week of the year, it is expected to brings a bitter taste all over the world except the oil-producing countries.

But how about India? India imports around 76% of its domestic demand and the increase in oil price is always a matter of concern for the policy-makers. But this time story is not all the same, while one side the international crude oil price is at all time high, the Rupee has appreciated by more than 12% which is highest at least last 20 years. The appreciation of domestic currency has offset the impact of high price to some extent.

The last increase in the domestic oil price was there in June, 2006 and which was followed with downward revision twice. The oil price has huge impact on general pricing and hence inflation. With the moderate and negligible increase in oil price government has well maintained the inflation and common man is happy about it. But, the bigger picture is quite ominous. The major supply of oil in India comes from the PSU’s like IOCL, BPCL, and HPCL. As per MoneyControl, Petroleum has an under recovery of nearly Rs 9.5, diesel Rs 11.3, LPG Rs 380 per cylinder, and kerosene Rs 21. This under recovery includes the marketing, which has to be shared equally between marketing companies (ONGC, GAIL etc) , upstream companies(IOCL, BPCL etc) and government .With crude oil price peaking all time high and subsidized petroleum price in domestic market, these companies are making huge losses. A part of loss is swallowed by the government by issuing oil bonds to these companies and rest partially compensated by the three marketing companies ONGC, Oil India, GAIL.

The political aspect of the pricing can also not be ignored. The central government coalition lost the election in Gujarat, Himachal and even in Punjab. The Lok Sabha election is going to be held in 2009 and government has to rely of appeasement approach. Left has already out its deep concern over any plan of increasing oil price.

Now, how the price moves in international market and what step government takes to tackle the situation is going to be quite interesting.