Black gold or petroleum seems to be pushing humanity into a corner. With International crude prices rising, India’s trade deficit has been widening, with the economy badly impacted. Petroleum, in one form or another, has been used since ancient times, and is now an irrevocable growth engine across societies. It makes or breaks economies, can bring down governments and drives technology. The dependence is so widespread today that its non-availability can trigger civil wars. Virtually the transport industry could come to a grinding halt. A host of derivatives like plastics, fertilisers, solvents, adhesives and pesticides have driven the support systems and are so inextricably linked with progress that their unavailability can sink an entire Nation.
The flipside of global warming is equally petrifying and is on the cusp of holding the human race by its jugular, but then so-called progress comes at a price. In terms of understanding, petroleum is a fossil fuel, formed when large quantities of algae, dead organisms, like those drifting in oceans, seas, and fresh water are buried underneath sedimentary rock and subjected to both intense heat and pressure. This process is naturally occurring, lest it be believed that it can be morphed. Components of petroleum are separated using a technique called fractional distillation i.e. separation of a liquid mixture into fractions differing in boiling point. Obviously, the price of petroleum and its products depends on its availability, its distillation, its purification methods, distribution costs, local demand, strength of local currencies, and local taxation.
It is a matter of concern that the price of petroleum has been on the rise effecting the economies of countries as it were. Many countries levy taxes to meet fiscal deficits. A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. So deficits rise from an accumulation of yearly deficits. A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favour of a balanced budget policy. The irony seems to be, first, establish a need. Then tax the need to meet deficits. How long can a country keep doing this? Add inflation and it affects growth and per capita income as well.
The Oil economics is highly complex and varied indeed. Since fuels are traded worldwide, the trade prices are expected to be similar, but are they? The local markets see 58 paise per litre as price of petrol in Venezuela, 140 rupees in Norway, and 85 rupees in Mumbai. The OPEC brands vary from 66 USD to 80 USD a barrel which is about 160 litres in the market today. Crude prices were at an all-time high of 146 USD in July 2008. It was a high of about 130 USD a barrel in July 2014, went down to almost 30 USD in February 2016 and is again on the rise clocking 80 USD at the current instant. At 80 USD per litre, the dealer price works out to Rs.36.22. Everything else is tax and profits.
What has caused this? An IMF working paper of January 2017 cites that features such as depletion, endogenous oil exploration and extraction, as well as features of oil need such as the secular increase in demand from emerging-market economies, usage efficiency, and demand responses all affect the prices. It further links it to a change in world GDP growth, war strategies across countries and a very complex international politico social dynamics.
Can’t we see a revision of prices on the other side of the curve, mitigating the effects for the common citizen? In 2017, when facing an election, the government cut duties by Rs.2 and the press release said “The government will incur losses to the tune of Rs 13,000 crore for the remainder of ongoing financial year and Rs 26,000 crore in a full year”. That would mean that the Rs.19.48 excise would add about Rs.250000 crores of taxes to the kitty. Excise duty on diesel has been increased by about 400% since 2014.from Rs 3.56 per litre in April 2014, to Rs 17.33 per litre, all in 3 years. In the case of petrol, excise went up from Rs 9.48 per litre to 21.48 per litre, a 127% increase. Later, it was reduced by Rs.2 claiming a loss of Rs.26000 crores. The excise duty on diesel was increased by Rs 2 or more per litre 4 times in the last 3 years. In the case of petrol, it was increased by Rs 2 or more 3 times in 3 years. The excise duty on unbranded petrol has been revised at least 10 times. This amounts to an estimated additional levy of Rs. 650,000 crores of excise/VAT and hence adds to the kitty both at the Centre and the State level. All these most certainly aid the government’s initiatives and better infrastructural facilities for the common man, but then, lower price burden on essentials is also a non-negotiable. There surely is a case for relook. The State government charges a draught cess of Rs. 3 on petrol when the State has been mercifully free from it. A similar amount on Diesel is charged for compensating losses through ban on Highway liquor shops when the SC has diluted much of the order. Using petroleum prices to cut budget deficits and using it as the only source for development may be debatable, and needs a serious look in.
A commodity that is not renewable by any means cannot drive a growth vehicle. Hence alternate energy sources must be explored. Hybrid policy makes sense for India. To the government’s credit, it must be said that it has given the country’s booming renewable energy industry a serious boost. The Ministry of New and Renewable Energy announced a new wind-solar hybrid policy recently that will see the installation of wind-solar-hybrid plants, where both windmills and solar panels are on the same piece of land. However, solar and wind power both work only when their source of energy is stable and consistent. Thus, only when the sun shines at a particular intensity will the solar panels convert it into electricity and similarly, a relatively high windy day is needed to rotate the blades at a meaningful speed to generate electricity. With most places in India endowed with Sun light almost 300 days a year and a wind speed in excess of 6 M/s it certainly is an energy that is waiting to happen. The centre has set an ambitious target of 175 Giga-watts of installed capacity from renewable energy sources by 2022, which includes 100 GW of solar and 60 GW of wind power capacity. That is an increase of over 100GW from the total renewable power installed capacity in India currently, which is about 70 GW. It is expected that by 2030, approx. Like all developments, this too has a share of serious concern, in acquisition of land for solar and wind farms.
The Indian economy that enjoyed its broadest upswing since 2014, is on a difficult path currently, with higher oil prices that are a drag on household incomes and consumer spending. It is also vulnerable, given that growth and industrial activity already are moderating under oil imports and other economic factors. Paying more for oil will pressure current accounts and make economies more vulnerable to rising U.S. interest rates. In this scenario, it is all the more necessary that the supply and demand side economics is juxtaposed to the needs of the common man.