High International Fuel Prices & Its Impacts

Context

• As the global recovery gains strength, the price of crude oil is nearing its highest level since 2018.
  • The price of natural gas and coal are hitting record highs amid an intensifying energy shortage.

Major Reasons for Rising  Fuel Prices

• Increase in global demand: The price of Brent crude breached the $85 per barrel mark earlier, reaching its highest level since 2018 on the back of a sharp increase in global demand as the world economy recovers from the pandemic. 
• Gradually increase in oil supplies: Key oil-producing countries have kept crude oil supplies on a gradually increasing production schedule despite a sharp increase in global crude oil prices.
  • The price of Brent crude has nearly doubled compared to the price of $42.5 per barrel a year ago.
• OPEC+ Group Decision: In its latest round of meetings, the OPEC+ group of oil-producing countries reaffirmed that they would increase the total crude oil supply by only 400,000 barrels per day in November despite a sharp increase in prices. 
  • The output of the top oil-producing countries – Saudi Arabia, Russia, Iraq, UAE and Kuwait — would still be about 14 per cent lower than reference levels of production post the increase in November.
  • OPEC+ had agreed to sharp cuts in supply in 2020 in response to Covid-19 global travel restrictions in 2020 but the organisation has been slow to boost production as demand has recovered. 

• Natural gas deliveries to Asia hit an all-time high of $56.3 per MMBtu (Metric Million British Thermal Unit) for deliveries in November.
• Disruptions caused by hurricane: 
  • Supply-side issues in the US including disruptions caused by hurricane Ida and lower than expected natural gas supplies from Russia amid increasing demand in Europe have raised the prospect of natural gas shortages in the winter

Image Courtesy: IE

• Coal factor: International coal prices have also reached all-time highs as China faces a coal shortage that has led to factories across China facing power outages. 
  • A faster than expected recovery in global demand has pushed the price of Indonesian coal up from about $60 per tonne in March to about $200 per tonne in October.

Impacts on India

• Crude oil prices:  High crude oil prices have contributed to the rise in the prices of petrol and diesel. 
  • And, India has seen a faster recovery in the consumption of petrol than of diesel after pandemic-related restrictions.
• Diesel: Diesel accounts for about 38 per cent of petroleum product consumption in India and is a key fuel used in industry and agriculture.
  • S&P Global Platts Analytics noted in a report that demand for diesel in India is expected to go up in the next few months with the upcoming festive season set to accelerate the economic recovery and push up diesel consumption. 

• Natural gas: High international gas prices have led to an upward revision in the price of domestically produced natural gas. 

• The increase in gas prices has put upward pressure on the price of both Compressed Natural Gas (CNG) used as a transport fuel and Piped Natural Gas (PNG) used as cooking fuel. 

• Coal: High international prices of coal have added to a coal shortage at India’s thermal power plants by forcing thermal plants using imported coal that could not pass on the higher price of coal to procurers to stop supplying power.
  • Low coal stocks at a number of coal-fired thermal power plants have led to power outages in a number of states including Punjab and Rajasthan and have forced states to buy power at well above normal prices on the power exchange.
• Impact on currency: Rising crude prices tend to depress the rupee, as India is a major importer of oil needs more dollars to buy the same amount of crude. 
  • A surge in crude prices tends to increase India’s expenditure and adversely affects the fiscal deficit. 

Steps Taken by India

• India and other oil-importing nations have called on OPEC+ to boost oil supply faster, arguing that elevated crude oil prices could undermine the recovery of the global economy.
• India has asked state refiners to speed up the diversification of oil imports to gradually cut their dependence on the Middle East after the OPEC+ decision.
• The country’s top refiner Indian Oil Corporation (IOC) has also renewed its oil import contract with Russia.
• India is also hoping to resume Iranian oil imports.

What more needs to be done in this context?

• ONGC should boost its investments in explorations and increase tie-ups with foreign players.
• Producers should be provided with enough technological support in extracting oil and gas from difficult oil and gas fields.
• The government should make the current system of auction and regulation more open and transparent than before and also convey this to foreign players.
• Also, it should provide fiscal incentives to attract foreign players to India’s upstream sector.
• The cess on domestically produced crude oil should be reduced so that the sector sees more private sector involvement.
• Efforts should be fastened in boosting oil and gas production under the government’s Atma Nirbhar Bharat initiative, which aims to boost the use of natural gas in India’s primary energy mix from the current 6.2 per cent to 15 per cent by 2030.

Source: IE