Global crude oil prices have declined by ~60% from US$ 112/bbl (Brent) in June 2014 to US$ ~45-50/bbl now (as in May 2016 end) primarily due to the significant increase in supply due to the shale oil boom in the US, demand slowdown in Europe, Japan and China and, the decision of Saudi Arabia to protect market share rather than act as a swing producer of oil.
Additionally with the lifting of western sanctions on Iran, the latter has been increasing its crude oil sales aggressively in a bid to capture its lost market share.
The results of a study commissioned by Petroleum Federation of India (Petrofed) that mandated ICRA to carry out a comprehensive analysis of the impact of the meltdown of the global oil prices on the Indian Oil and Gas industry reveals that crude oil prices are expected to remain at moderate levels in the near term because of high supplies, modest global demand and lack of consensus within the Organisation of the Petroleum Exporting Countries (OPEC) to cut production of oil.
With the precipitous decline in international crude oil prices, the economics of gas vis-à-vis alternate fuels such as fuel oil have been adversely impacted.
Accordingly, prices of gas at various international hubs and spot prices of LNG have also declined leading to the material fall in domestic gas prices.
Going forward ICRA research expects the prices of gas at various international hubs to remain muted in the near term, owing to the weak outlook for crude oil prices and accordingly crude derived alternate fuels.
With regard to the impact of the fall in oil prices on the Indian economy, the fall in the average price of the Indian crude oil basket from US$ 105/barrel in FY2014 to US$ 84/barrel in FY2015 and further to US$ 46/barrel in FY2016 had a significant impact on the overall macroeconomic scenario, particularly since India is a large net importer of fuels.
While imports came down sharply, the impact on other external balances was less pronounced, on account of a multitude of factors.
Moreover, lower prices of crude and mineral oils contributed to a sizeable decline in WPI inflation, whereas the impact on CPI inflation was relatively muted.
Whilst the decline in fuel prices has both reduced the fuel subsidy outgo and boosted excise duty collections, the fiscal balances of the Central Government on an absolute basis have not shown a commensurate improvement on account of a variety of other factors – including a rise in interest payments and capital expenditure.
Sales tax/VAT on petroleum products is a sizeable contributor to the overall revenues of the State Governments. The volume of inflows from this source depends on the following factors: the domestic price of fuel (which in turn depends on global crude oil prices, exchange rate dynamics, excise duty levied by the GoI and the rate of sales tax/VAT levied by the State Government) and the consumption of such products.
After the recent fall in the retail prices of fuels, the pace of growth of sales tax/VAT collections on petroleum products has eased significantly, as such levies are typically on ad valorem basis.
Currently, Writing a Book for Penguin India Titled Greased Pole:How Politics and Lobbying Stifled India’s Energy Dreams. The author can be reached on firstname.lastname@example.org (9810661825)
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