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Current Affairs 100

CSFC - 2023
Civil Services Foundation Course

Oil Price Rise and its impact on India

Relevance: For Prelims: Sweet v. Sour Crude Oil, WTI and Brent; For Mains:
GS-3- Indian Economy and Energy Security

Why in news?

 Following Russian deployment of troops to separatist areas Donetsk and

Luhansk in Ukraine, Brent crude prices hit $96.7 per barrel
recently. While the West has condemned it as a flagrant breach of
international law, rising global tensions and the threat of invasion in
Ukraine have caused oil prices to rise and stock markets to crash.
 Following tensions between Russia, the world’s second-largest oil
producer, and Ukraine, oil prices have risen in recent months due to
supply concerns.

Crude Oil and India

 Given its high dependence on imports, India remains vulnerable to

volatility in the global crude oil market. The country has tried to spread
its risks by diversifying sources of crude oil, but falling domestic
production and heavy dependence on imports remain a worry.
 Declining Domestic Production
o India’s major oilfields are well past their prime Crude Output Ratio
(Million Tonnes).

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o Government has taken steps in this direction, for instance,

recently released Open Acreage Licensing Policy (OALP) is
considered to be the next big thing.
o State-run oil companies are expected to see a huge increase in oil
and gas production by 2022. OALP will allow oil companies to go
for more exploration. The last round of New Exploration Licensing
Policy (NELP) was almost a decade back.
o Main advantage of OALP over NELP is of having no cess, reduced
royalty rates, marketing freedom for gas and a revenue-sharing
model. Although the incentives that the government has provided
will give a big boost to oil companies, however, enhanced oil
recovery (EOR) policy needs further review.

Impact on the Economy

 Inflationary, fiscal, and external-sector risks are all posed by the rise in
crude prices. Crude oil-related products account for over 9% of the WPI
basket, and a 10% increase in crude would result in a 0.9 percent
increase in WPI inflation.

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 India imports more than 80% of its oil needs, but oil imports account for
only about a quarter of its total imports.
 The current account deficit - the difference between the values of goods
and services imported and exported - will be impacted by rising oil
prices.
o It is estimated that a 10% increase in oil prices will result in a $15
billion increase in India’s CAD, or 0.4% of GDP.
 As crude oil prices rise, the subsidy on LPG and kerosene is expected to
rise as well, increasing the subsidy bill.
 Following the rise in crude oil prices, the cost of aviation turbine fuel
(ATF) has also advanced 19 per cent to Rs 90,519 per kl from Rs 76,062
per kl. The rise in ATF prices may hit the balance sheet of airline
companies which accounts for more than 35 per cent of the cost of
running an airline in India.
 Trade deficit will widen; the rupee will depreciate and inflation will rise.
 From $73.8 to $74.84, the rupee has lost over 1.4 percent against the
dollar.

Impact on Consumers

 High crude oil prices contributed to a spike in gasoline and diesel prices
in 2021, which reached new highs across the country.
 Pump prices fell after the federal government reduced excise taxes on
gasoline and diesel by Rs 5 and Rs 10 per liter, respectively, and most
states followed suit by lowering VAT.
 Even if the government absorbs part of the crude spike through excise
cuts, part of the hike will have to be passed on to consumers resulting in
cost-push inflation.

Impact on investor

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 In response to rising crude prices, investor sentiment has taken a hit in

recent days. Recently, foreign portfolio investors turned net sellers,
withdrawing a net of Rs 51,703 crore from Indian equities, causing
equity markets to fall and become more volatile.

Way Forward

 Electric Mobility
o Since the transport sector accounts for around 70% of the total
diesel sales in the country, it is for a transition from traditional
fuels to electric motors.
 Biofuel Blending
o Increasing the blending proportion of domestically available
biofuels in cooking gas and transportation fuel is another way to
reduce India’s reliance on imported crude oil.
 Taxation
o In the near- to medium-term, it is imperative to explore how fuels
can eventually be covered under the goods and services tax (GST),
which is essential not only to reduce any undue burden on users
but also to prevent leakages and achieve efficiency.
 Sustainability
o India also needs to accelerate its adoption of renewable energy
program. International Solar Alliance, Paris and Glasgow
Commitments, Target of 175GW by 2022 are some of the steps in
the right direction. What needs to be done is to streamline and
integrate these targets with developmental and economic planning.

Conclusion

 The right option now is to use the current situation as an opportunity to

push for initiatives that are in the best interest of the country.

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 Reducing the country’s reliance on oil imports would bode well for energy
security, and make our financial markets less volatile in the event of
untoward developments in the oil market.
 Savings from reduced oil imports could in turn be used to finance
infrastructure projects, which are crucial for India’s long-term growth
prospects.

Prelims Facts

 Sweet v. Sour Crude

o Sweet crude oil is considered “sweet” if it contains less than 0.5%
sulfur. In comparison, sour crude oil contains impurity sulfur
levels larger than 0.5%.
o Sweet crude oil contains small amounts of hydrogen sulfide and
carbon dioxide and it is commonly used for processing into
gasoline, kerosene, and high-quality diesel.
o Before sour crude oil can be refined into gasoline, impurities need
to be removed, therefore increasing the cost of processing. This
results in a higher-priced gasoline than that made from sweet
crude oil.
o For this reason, sour crude is usually processed into heavy oil
such as diesel and fuel oil rather than gasoline to reduce
processing costs.
 Brent v. Western Texas Intermediate (WTI)
o Brent is oil that is drilled out of the North Sea adjoining the UK
and Norway while WTI Crude is extracted in the US.
Predominantly, US oil is concentrated in Texas, North Dakota and
New Mexico.
o It is estimated that nearly 60% of all crude in the world is priced in
terms of Brent Crude, with only the US and Canadian oil being
priced in WTI crude. The reason Brent is more popular as an oil

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benchmark is that it is a more efficient representative of oil prices.

While Brent oil wells are in the sea, WTI oil wells are landlocked.

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