Time to Rethink Whether High Fuel Prices Helps the Cause of India’s Development

Author: Himanshu Ranjan

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The global crude oil production per day was about 75.21 million barrels per day in November 2020. Usually, it is about 83 million barrels per day but due to the COVID-19 crisis the demand got hit, and therefore production was lowered. However, the crude oil demand is set to increase in the year 2021 to about 95 million barrels per day.

United States, Russia, and Saudi Arabia are the top oil producers. In 2019, the US became a net oil and gas exporter due to the fracking done in the shale formations of Texas and North Dakota. The world’s total proven oil reserves are about 1.77 trillion barrels with Venezuela at the top. India has a proven oil reserve of 4.6 billion barrels. 

OPEC (The Organization of the Petroleum Exporting Countries) was founded in the year 1960 in Baghdad. The five founding members of OPEC are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Currently, it has 13 members – Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela. According to an estimate, about 79 % of the world’s proven oil reserves are found in OPEC member countries giving them leverage to control oil prices to a certain extent. However, higher oil prices lead to firms pumping oil from unconventional sources such as US shale or Canadian oil sands that are expected to keep oil prices from skyrocketing. 

The benchmark crude serves as a reference price for buyers and sellers. These are primarily – West Texas Intermediate, Brent Crude, Dubai Crude, and OPEC Basket. They differ in their API gravity and Sulphur content as well as their prices. A higher API indicates a lower density crude, and low sulphur content crude is known as sweet crude. Brent crude is a high-grade crude and is priced higher than WTI crude even though it is slightly more dense and sour. 

The major oilfields found in India are in upper Assam along the Brahmaputra Valley, in the region of Gulf of Khambat, Barmer district of Rajasthan, Mumbai High, and in the Krishna-Godawari off-shore basin. These include the Digboi field, the Naharkatiya field, and the Moran-Hugrijan fields in Assam. The Ankleshwar field, the Lunej field, the Kalol fields near the Gulf of Khambat.  The Mumbai high, Bassein, and Aliabet offshore fields on the western coast. The Rawa field in Krishna- Godawari off-shore basin, and the Narimanam and Kovilappal oilfields in the Cauvery on-shore basin are also significant. 

India has to import about 82 % of its petroleum-based requirements. It imported about 270 million metric tons of crude oil or roughly 1.97 billion barrels of crude oil in 2019-20. In the year 2019, mineral fuels including oil accounted for about 32 % of the total imports. Thus, about 153 billion US dollars were spent on importing mineral fuels including oil out of the total import bill of about 480 billion US dollars in 2019. 

It is also worthy to note that the export of processed petroleum accounts for 13.7 % of India’s total export of 323 billion US dollars. India has an excess of refining capacity. The current refining capacity is about 250 million tonnes per year which is more than the 213 million tonnes of annual consumption. India plans to double its refining capacity by 2030 keeping in view the expected rise in demands. Some of the refineries in India are Jamnagar, and Nayara in Gujarat, Manali and Nagapattinam refinery in Chennai, Paradip refinery in Odisha, Bina refinery in Madhya Pradesh, Kochi refinery, Mangaluru refinery, among many others. 

In order to face any sudden crisis event in the supply of crude oil, India has developed strategic petroleum reserves of about 5.3 million metric tonnes or roughly about 38.69 million barrels. Another 6.5 million metric tonnes are approved in PPP mode under phase 2 projects. These strategic petroleum reserves are located in Vishakhapatnam, Padur (Karnataka), Mangaluru, and Chandikhol (Odisha). Once the phase 2 projects are also finished, these reserves can provide for about 22 days of consumption. Indian refiners also maintain crude oil storage for about 65 days of consumption. Thus, India has an overall oil storage reserve for 87 days of consumption. 

In March 2016, HELP (Hydrocarbon Exploration and Licensing Policy) was approved by the Government of India replacing NELP (New Exploration and Licensing Policy, 1997). HELP provided for a uniform license for exploration and production (E & P) of all the forms of hydrocarbons such as coal bed methane, gas hydrates, shale oil & gas, among others. A revenue-sharing model, an open acreage policy, and freedom to price (restricted to a ceiling limit) and market the crude oil and gas thus produced have removed many of the drawbacks of the NELP.

A comparison of both the policies – HELP, and NELP is given below:

ParameterHELPNELP
Fiscal ModelRevenue sharingProfit-sharing
Cost recoveryNot applicableYes
Cost efficiencyEncouragedNeutral
RoyaltyLow rates for offshoreStandard rates
Exploration PeriodOnland and Shallow Water- 8 years Deepwater- 10 yearsOnland and Shallow Water- 7 years deep water & Ultra-deepwater – 8 years
Management CommitteeMore focus on  reservoir monitoring; no micro-managementTechnical & financial examination
Revenue to GovernmentOn productionAfter cost recovery i.e. from profit petroleum
Exploration in Mining Lease areas Allowed Not allowed
E&P activity for all hydrocarbons AllowedNot allowed 

Source: Arthapedia 

The FDI guidelines have been supportive so far with 100 % Foreign Direct Investment (FDI) in upstream and private sector refining projects. For public sector refining projects 49 % FDI is allowed under the automatic route. 

In the year 2002, ATF (Aviation Turbine Fuel) price was deregulated. Subsequently, in the year 2010, petrol prices got deregulated. In 2014, diesel prices were also deregulated. However, when crude oil prices fall in the international market, the government instead of passing the benefits to the consumers rather raises the tax on it.

The cost of one liter of petrol has become very high in India as of 26 February 2021 as shown in the pic below.

Source: IndianOil ONE

The different price components of gasoline (petrol) in Delhi, India as of 16 February 2021 is: 

ComponentPrice per unit (Rs/liter)
Base price31.82
Freight etc0.28
Excise Duty32.9
Average Dealer Commission3.68
VAT20.61
Total Retail Selling Price89.29

Source: Indian Oil Corporation data 

The Indian constitution empowers the central government to tax the production of petroleum products. The states have the power to tax the sale of petroleum products. So far, petroleum has not been included under the GST (Goods and Services Tax) regime. 

The short term optimal revenue can be at a price when marginal revenue equals the marginal cost. High fuel prices not only negatively affect consumer demand but also leads to inflation. The movement of people and goods is an essential component of any economy. High fuel prices put a brake on that. Also, high fuel prices do not provide optimal revenue as it hits fuel demand. 

Therefore, it’s become highly imperative that the government reduces the high fuel prices, and works to reduce the dependence on crude oil by boosting investment in exploration activities. The electricity generation efforts should shift towards the usage of renewable technology. Meanwhile, refining capacity needs to be further boosted so as to earn revenue through exports of processed petroleum products.

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