Govt must protect consumers from rising oil prices
Crude oil prices have become volatile again after a period of relative stability, sending jitters across economies of oil-importing countries. It began with big oil producers Saudi Arabia and Russia combining in July to cut a total production of 1.3 million barrels per day. This pushed up crude oil prices that had been hovering around $75-85 a barrel since last October. Earlier this month, the two extended the production cuts to the end of December 2023, pushing up the benchmark Brent crude to around $94 a barrel for the week ending September 15. There has been talk of crude hitting $100 again, but by Tuesday, despite the cut in production, prices began to slip amid concerns that fuel demand will be curbed by major central banks holding interest rates higher for longer.
All this is leading to some diplomatic realignment. The Saudis are claiming they need more oil money to fund Vision 2030, an ambitious plan to reduce the kingdom’s dependence on oil. However, the US is not amused and has hinted at imposing sanctions on its former close ally. Higher prices would also help Russian President Vladimir Putin fund his war on Ukraine. At home, though, all this is bad news. Indian companies that had increased their profit margins in the last few quarters are seeing the margins evaporate as oil and energy bills surge. The situation has become even more untenable as slackening consumer demand is hurting revenue growth.
On the broader economic stage, with India importing 85 percent of its oil, rising crude prices will mean a heavier import bill and will dent our reserves. In the longer term, the domino effect can be serious. Higher energy costs will add to the inflationary pressure caused in recent months by the soaring food prices. With less disposable income, family spends will be curtailed, causing a pullback in overall demand. It has all the makings of a recession combined with inflation, a potent decelerating force. In this situation, the government will do well to keep fuel prices under check and not pass on the entire burden to the common man. In the past, when crude prices had fallen to below $60 a barrel, only a fraction of the saving had been passed on to consumers. By the same logic, consumers cannot be ordered now to pay for higher crude bills. These should be set off against the windfall gains made last year.