Russia’s continuing war on Ukraine has begun to show its ripple effects on India’s fuel and energy markets, with global crude oil prices shooting past the $100 (Rs 7,527) a barrel (159 litres) accentuating the oil crisis in the country— the highest recorded since 2014. As the situation escalates between the two warring countries, the oil rates are bound to go up further casting the shadow of inflationary pressures across the board, making life difficult for the millions, especially when global crude oil prices had already been elevated since the middle of 2021 and have since been rising continuously thereon. The crisis has been putting even more pressure on the already stressed global energy supplies and low storage levels around the world.
India imports only under two per cent of its crude oil from Russia, making it less vulnerable to supply disruptions. However, the country is susceptible to global price rises and India like other nations would find it difficult to be able to avert off the impending oil crisis due to the ongoing Russia’s war.
Furthermore, the United States and its allies have imposed sanctions on Russia after it began the military assault on Ukraine and the ongoing situation is only likely to further limit the global supply of crude oil, pushing the prices up. If the conflict continues to escalate with Russia retaliating against the US and European sanctions by reducing or suspending oil exports, the oil prices could escalate even further very quickly.
Within India, industries are likely to take the biggest hit with consumer demand further suffering, which may have medium to long term impact on India’s economy and its development, in the aftermath of having faced depressed economic and industrial activities in the recent past due to COVID-19.
India is a deregulated market now where oil prices are determined based on what happens globally and largely driven by demand–supply scenarios. Public sector Oil Marketing Companies (OMCs) thus revise the retail prices of petrol and diesel fuel in India according to changes in the international energy markets. Other factors that play a role include exchange rates, tax structures, inland freight rates and any further additional costs. Dealers also play a part, making up to 42% of the retail price in the case of petrol and 49% of the retail price in the case of diesel, as of October 16, 2021.
Another important factor determining oil prices in India are taxes levied by the Centre and sub regional governments. The Central taxes Rs 32.9/Litre on petrol and Rs 31.8/Litre on diesel, constituting 31% and 34% of the current retail prices of petrol and diesel, respectively. The value-added tax imposed by the sub regional governments also determines fuel price rates. Delhi for instance charges 19.4% and 17% on petrol and diesel while sub-region of Rajasthan’s share is 31.04% and 19.3%, respectively.
In such a scenario, lowering tax rates is the only way the government can keep high crude oil prices from trickling down to the end consumer. When such a reduction is undertaken, planned expenditure set earlier by the central government are disrupted and there are less financial resources available for purposes of development initiatives.
This situation, further, throws light on India’s energy security problem with the country importing over 85% of its oil needs, with Saudi Arabia and the United States being its biggest suppliers. The United States has put Iran under sanctions, following which India stopped buying oil from the Iran in 2019. Saudi Arabia could potentially use the conflict to increase its own oil rates. The country bases its expenditure budget on oil being around $80.
On the other hand, there may be some good news. The ongoing conflict could benefit the clean energy market as India has already started increasing its investments in electric vehicles and green hydrogen segments, which are substitutes for oil and gas.
India and Russia have long been friends. Russia has already offered India oil at a deep discount and the country has accepted to import more than 3 million barrels which would in part save foreign reserves for India with transactions taking place in local currencies. India has politely declined entreaties by US and Australia stating that the fuel prices being offered are very expensive.
Wars and conflicts thus serve no purpose whatsoever for any nation and their people and should therefore be abstained from at all costs. Moreover, the world is deeply connected through commodities, energy prices, development cooperation and supply chains and one conflict in one part of the world is bound to impact other parts as well. Russia’s war on Ukraine thus is an economic catastrophic for the world at large beyond the limited political purposes and gains it may potentially serve for some.
This Post was submitted by Climate Scorecard India Country Manager Pooran Chandra Pandey