The United States may have just started another war that it cannot win. This time it is in the oil market, the foe is the powerful OPEC+ cartel and the prize is lower oil prices.
President Joe Biden has roped in a new, motley set of allies in China, India, Japan, South Korea and the UK, which, together account for a little less than half the total oil consumption in the world.
In an unprecedented move, the group has initiated steps to release crude oil from their respective strategic reserves that together add up to about 70 million barrels.
The move appears aimed as much at cooling rising prices as sending a signal to the OPEC+ that the patience of its consumers is wearing thin.
Though the angst is justified, neither of the two objectives may be achieved simply because the balance of power — control over oil reserves — rests with the OPEC+.
Though prices may be nudged downwards in the short term — and that has not happened in the 24 hours since the move was announced — in the long term they are bound to bounce back simply because the firepower that the group commands is limited in its ability to influence supply dynamics.
Yes, the United States has over 600 million barrels in its strategic reserve and China has another 238 million barrels (as of 2017, the last available official data) while India has 38 million barrels, all of which add up to a substantial number.
But these are meant to be drawn down only when supplies are blocked either due to war or a natural calamity. There is a limit to which they can be used to influence prices.
The OPEC alone, in comparison, lords it over more than 1,100 billion barrels, which is 80 per cent of global oil reserves.
The equation is clear. Ironically, oil prices moved up after the announcement by the US and India on Tuesday, partly because the move was already priced in by the markets and partly because the market anticipates the OPEC+ to retaliate.
Chances are that the cartel may decide not to go ahead with a planned increase of 4,00,000 barrels a day in order to nullify the impact of the release from strategic reserves. Such a move would drive home the message to the US-led group that the weapon they are brandishing is blunt and limited in power.
President Biden’s move has to be seen in the backdrop of the friction between the US and Saudi Arabia in recent times with the former refusing to play ball with the Mohammed Bin Salmanled Saudi Arabia in the backdrop of the killing of journalist Jamal Khashoggi.
Where does all this leave India?
Given the limited size of its reserves which add up to just about a week’s consumption, India may have erred in joining the US initiative. There is unlikely to be any gain in terms of lower prices; if anything, there will be a cost to this move as the country will have to top up its reserves again at the current high prices.
The focus of the government ought to be on building additional storage to increase the reserves to at least a fortnight’s consumption, rather than squander parts of it in symbolic exercises that fail to advance its national interests.
OPEC Counties:-
India’s Strategic Oil Reserves:-
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.