Fuel prices likely to see a hike after conclusion of forthcoming state assembly polls

The ‘adjustment’ petrol and diesel prices have hit historical highs, pointing to the real price shocks that lie on the road ahead for the consumers, who may be deceived to believe that the government would continue to lend them support. Prices are moving perilously close to the psychological level of Rs 100, which might happen any time now.

Finance Minister Nirmala Sitharaman’s budget had announced a Rs 2.5 percent cut in excise duty on fuels, which provided only a semblance of relief, as the drop was matched by an equal amount of agricultural cess.

The government’s so-called open market policy is in reality an adjustment policy, under which all kinds of adjustments are made both by the government – the state governments included – and the oil companies. There are political adjustments as well as economic, together with quid pro quo between the government and the oil companies, all in the name of open market policies.

The current ‘adjustment’ is in view of the crucial assembly elections that are coming in strategically important states for the ruling BJP, particularly West Bengal where the saffron party is making a daring move to snatch the state from Mamata Banerjee’s TMC.

The public would do well to recall what happened in the run-up to the all-important state assembly elections in eight states, including Karnataka, Madhya Pradesh, Rajasthan, Chhattisgarh and Telangana. In a clear case of adjustment, the oil companies were ‘voluntarily’ holding the prices, ‘absorbing’, if that is what they do when not increasing the prices, the changes in the international markets.

But no sooner than the elections results were out, they virtually went on a spree, raising prices mercilessly so as to recoup whatever they may have lost technically during the price-holding exercise. Technically, because there is no transparency in their numbers, just like those cited by the government in working out the prices that retail consumers are supposed to dish out.

By all indications, the post-election scenario this time promises to be much more trying for the consumers, considering that dark clouds are already hovering over the global price horizon. Brent prices have breached the psychological level of 60 dollars for the first time since the Covid pandemic played havoc with the world, oil market having been no exception.

The resurfacing of the 60-dollar oil has been liberally helped by some concerted action between the OPEC cartel and Saudi Arabia, which has the trump card in crude oil pricing on account of its domineering role in the supply system. Additional boosts like Covid vaccine and an expected stimulus package by Biden’s US administration have also made significant contributions. Prices have not waited for the market to return to pre-Covid levels.

A deeper output curtailment programme announced by the Saudis recently has made a difference of a million barrels of fewer oil flowing down to the market. Saudi Aramco also raised selling prices to Europe, which also was a supporting slap on the shoulder for the whole market to rethink its pricing.

Traders seem to believe that the OPEC and Saudi support are enough to balance the hurt demand, and perhaps do more. The market is seeing storage levels falling week after week, which is a natural major boost for prices, justifying the overall sentiment today.

Apart from the expected US stimulus package, American politics has also had a bearing on the market sentiment. The new US administration has hinted that Iran sanctions will not be lifted just for the country to return to the negotiating table. Iran was hoping for a quick resolution and withdrawal of the US sanctions, to push more oil in exports, a development that now seems to need more time to happen. Any delay in bringing Iranian oil back to the market is also a boost for the prices.

The oil market is now watching for the moment when the market can move on its own and does not need Saudi Arabia and the cartel to provide momentum. The only point of consolation for the consuming countries, such as India, is that it is taking a bit longer to happen, given the current demand trajectory.

(IPA Service)