Saturday, 11 October 2014

Fuel prices may see steep decline





The continued low global oil prices would allow the government to breathe easy as the macroeconomic environment improves substantially. (Reuters Photo)



NEW DELHI: Hefty cut in fuel prices are round the corner as global benchmark oil prices continue to fall, dropping below $90 a barrel on Friday as Iran joined Saudi Arabia in a discount war - something unthinkable till now.

The continued low global oil prices would allow the government to breathe easy as the macroeconomic environment improves substantially. But the Centre is unlikely to deregulate diesel pricing in a hurry, opting instead for periodic price modulation to avoid future shock in case crude prices rebound.


Crude prices have remained depressed mainly due to four factors: Rise in output from Iraq and Libya in spite of the unrest in the region, receding hopes of an immediate uptick in the Eurozone economy, tepid growth in China's appetite and new players such as Russia and US nibbling at the markets fed by traditional suppliers.


Oil prices have dropped over 20% since June, with global benchmark Brent testing $88.44 a barrel on Friday as Iran matched Saudi Arabia's discount of over $1 a barrel to retain market share amid traditional consumers who are increasingly looking at new sources.

The mix of crude India buys also averaged $90.5 on Thursday and is expected to reflect Friday's fall on Monday. As an immediate effect, consumers can expect another cut in petrol price next week. The government would pare diesel price by Rs 3 a litre or so in October once polls get over in Maharashtra and Haryana.


A hefty cut in diesel price would bring down road and rail freight. Since this would coincide with winter crops and vegetables starting to flow into the market, the impact at consumer level is expected to get amplified by way of a sharp reduction in the prices of rice, pulses and vegetables, thereby bringing down inflation.


On the macroeconomic front, low oil prices would reduce the oil import bill and mean lesser outflow of foreign exchange. This would ease current account deficit. The fuel subsidy burden would also come down drastically, especially with over-recovery in diesel touching Rs 2.50 a litre at last count. All these would have a bearing on the government's fiscal deficit situation, which in turn would reduce the imperative to hike taxes and a positive impact on interest rate regime.


All these would happen even without officially deregulating diesel, though the pressure from private fuel retailers to open up the market would increase. But the winter demand is round the corner, which many producing countries expect would help prices to rebound. It remains to be seen whether the government would deregulate diesel quickly or prefer to wait and watch the shifting sands of global oil market.







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