Prepare for oil price above $60 a barrel–Economic Times–06.11.2017

Governments can achieve fiscal discipline by curbing wasteful spending, prioritising investment over consumption expenditure and so on. In addition, they can just get lucky. When Narendra Modi took office in May 2014, oil prices, measured by benchmark Brent crude, were around $113 per barrel. By January 2015, it had crashed to $50 per barrel, and to $29 by January 2016. India imports a little more than 80% of its oil, around 1.2 billion barrels every year. A sharp drop in crude prices means a fall in the outflow of import dollars, a relatively stable rupee, benign inflation and a revenue bonanza for the government that can tax away much of the fall in prices from consumers. It is easier to maintain fiscal balance. This lucky streak has been slowing for some time; crude prices are up at $61per barrel now.

On Thursday, members of the 14-nation cartel of oil producers, Organisation of the Petroleum Exporting Countries (Opec), said in Bangkok that it would continue cutting production till ‘normalcy’ comes back. This is interpreted to mean a fall in the oil inventory held by 35 rich nations that form OECD, to a long-term average level. Today, OECD has stocked up nearly 1.17 billion barrels of oil, lower than its mid-year high of 1.25 billion barrels. If Opec wants this inventory to come down to OECD’s five-year average of a little more than one billion barrels, it will continue to squeeze production and hike prices for months to come.

The government has to prepare for significantly higher oil prices. A $1hike in the price of a barrel costs us an extra $1.2 billion every year. The $30 increase since January means a $36 billion jump in oil import cost. India has never held significant inventories of crude. We should build strategic reserves, join consortia to extract oil from Iran and build stronger energy partnerships with non-Opec producers like Russia. The government slashed taxes on petro fuels prematurely. If crude prices rise further, a parable tax cushion is needed to spare consumers extreme pain. This is so, even as higher crude prices reflect global growth, which will boost India’s overall exports.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

via Prepare for oil price above $60 a barrel

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