By Harsh Vardhan Singh
The year 2017 was disappointing for the petroleum industry. Oil prices were down despite OPEC nations putting all their efforts to raise them by cutting their oil production. However, this situation seems to be in favour of India. As an importing country with inelastic demand, India imports about 82% of its oil requirements. The net oil imports stood at about 2.4% of GDP as of FY17. With falling oil prices, India gains bargaining power with some nations and re-doing deals to take full advantage of the situation.
The Indian government increased excise duty to control deficit and deregulate the oil market, which directly benefited public investment, households and firms. But now, the time has changed—oil prices surged 42% in six months to $65. In a meeting with OPEC/NON-OPEC last month, Russia agreed to cut oil production till 2018. India may witness some surprises in 2018.
Demonetisation is a probable reason which slowed down the oil and gas industry in 2017. The introduction of new tax reforms in the middle of the year 2017 didn’t help matters either. So, in 2018 as expected, if Indian economy does well then an increase in the demand for petroleum products including diesel, petrol, naphtha, ATF, etc will be seen.
Increasing oil prices would affect Indian petroleum sector badly
OPEC is very optimistic towards increasing oil prices. According to IMF, Saudi Arabia will need oil prices at $70 for fiscal break even in 2018. A meeting of OPEC/NON-OPEC countries last month put all efforts to increase oil prices with a production cut. As India is an oil importing country, increasing oil prices negatively affect the Indian petroleum industry. The Indian government cut excise tax rate last month to compensate increased oil prices globally. Since 2014, when oil prices slightly declined, at that time the government got the revenue of 0.9% of GDP which will benefit to maintain public interest and also benefit the households and firms.
According to Nomura, every $10 per barrel increase in oil prices affects consumer price inflation by 0.6-0.7 percent. And as it is in 2018, the government and the policymakers are under pressure to put oil prices down because State Assembly elections in 2018 and Parliamentary Elections in 2019 are approaching. The macroeconomic position of India is good at this time. The macroeconomic individual indicator may not look worrying, but in case if we put some uncertainty caused by Goods and Services Tax (GST), it may worsen the situation in the calendar year’18.
Step towards making “Behemoth”
The government of India is taking the initiative to merge all state oil firms and make a major oil conglomerate that will emerge globally. So, a plan of combining all 7 major PSU together and making one major company will also be the biggest opportunity for the Indian petroleum sector. As news came last week that IOC & BPCL are keen to merge with GAIL but GAIL wants to merge with ONGC. GAIL thinks that the merger with ONGC will be more profitable as they both are in the natural gas business so it helps to make a business network. So, we would see lots of new deals in the calendar year’18 which will affect the Indian petroleum sector
Including petroleum products under Goods and Services Tax (GST)
The Union Finance Minister Arun Jaitley last week said that the government supports the idea of including petroleum products under GST. And there is more chance of including petroleum products under GST in 2018 because of an increase in oil prices. Government is under pressure to keep cutting the excise duty. By 2018, the government is planning to include natural gas under GST. As we see the effect of increasing oil prices, the Central Government appeals to states (Maharashtra and Karnataka) for reducing tax rates on petrol and diesel. If the government wants to include petroleum product then natural gas would be the best candidate to include firstly under GST.
- With a rise in oil prices, one big question arising for the Indian petroleum sector is that price of oil is potentially going up by $70. India keeps asking the question, “Do you still want deregulated oil going?”
The government keeps cutting excise rates with a rise in the oil prices. Petrol and diesel are deregulated which means a dollar for a dollar and the government compensating the rise in price by cutting excise rates. And if oil continues to rise, then it will expand India’s import bill, boost inflation and then it will be a very difficult task for Reserve bank of India to cut interest rates.
- The next big change we will see in the calendar year 2018 is to apply the BS 6 norm in Delhi by April 2018. Pollution is increasing day by day in Delhi. The ministry is in talks with Oil Marketing Companies (OMC’s) and came up with a decision to apply BS 6 norm by April 1, 2018.
- A government also put efforts to push Electric vehicles and use less fossil fuel to take a step towards greener energy and introducing new policies to increase biofuel use. Introducing EVs is not affecting petroleum products much, however.
- Above all, some new projects are going to complete in 2018 like 700km Paradip-Durgapur, Haldia pipeline among others.
Featured Image Source: Visual Hunt
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