A FUEL PRICE STABILIZATION FUND SHOULD BE A GOOD IDEA
A FUEL PRICE
STABILIZATION FUND
SHOULD BE A GOOD IDEA
The
idea of creating a Fuel Price Stabilization Fund, though may look little out of
box, however should be a Good Idea for India and most of the countries dependent
on import of Petroleum Oil for their hydrocarbon fuel need; whoever likes it. I
may cite the situation of India here as example frequently in this article, as
it is at my easy reach and firsthand experience as I live in India, however the
explanations are, and could be, globally relevant.
The
present upward speeding prices of common hydrocarbon fuels, such as Petrol and Diesel
which are used for common automobile consumption for passenger as well as cargo
transportation is a great cause of concern as to how far this phenomenon can go
and how it can be managed if the Crude Oil Price internationally reaches more and
bigger heights than the present.
The
price of Crude Oil internationally, has exhibited periodic ups and downs historically,
with massive lows and massive highs over periods of time, there is enough data
available on it in public domain in internet for anyone to access easily and
imbibe the information. The Crude Oil is refined to produce the common Petrol
and Diesel. The countries who have deficit of Crude Oil production and their
own production of Crude Oil is not enough to meet their internal need of Petrol
and Diesel have to import Crude Oil from the Surplus Crude Oil Producing Countries,
refine it to produce the Petrol and Diesel as well as other Petroleum
Derivative products. Refining of Crude Oil is normally a local activity for the
Crude Oil importing countries. The Petrol and Diesel produced out of Crude Oil refining
is generally consumed inside the Nation. The other Petroleum Derivatives may be
also consumed inside the Nation and in some cases where it is surplus, it is exported
to other countries.
The Global scenario of Crude Oil imports for the year 2019 as instance is as follows:
Global purchases of imported crude oil totaled US$1.056 trillion in 2019 reflecting strong demand from 117 countries, territories or islands.
Overall, the dollar cost of crude oil imports for all importing countries grew
by 25.5% since 2015 when crude oil purchases were valued at $841.6 billion.
Year over year, imported crude oil fell by -12.1% from $1.201 trillion for
2018.
Comparing metrics by continent, Asian countries bought the highest dollar worth
of imported crude oil during 2019 with purchases costing $572.5 billion or
54.2% of the global total. In second place were European nations at 28.2% while
13.9% of worldwide crude oil imports were delivered to North America. Smaller
percentages went to Latin America (1.5%) excluding Mexico but including the
Caribbean, Africa (1.1%) then Oceania (also 1.1%) led by Australia and New
Zealand.
For research purposes, the 4-digit Harmonized Tariff System code prefix for
crude oil is 2709.
The top 15 countries that imported the highest dollar value worth of crude oil during 2019 are the following ( the % figure in the brackets are share in Global Crude Oil Imports for 2019 ) :
- China: US$238.7 billion (22.6% of overall imported
crude oil)
- United States: $132.4 billion (12.5%)
- India: $102.3 billion (9.7%)
- Japan: $73.1 billion (6.9%)
- South Korea: $70.2 billion (6.6%)
- Netherlands: $46.4 billion (4.4%)
- Germany: $40.7 billion (3.9%)
- Spain: $30.5 billion (2.9%)
- Italy: $29.6 billion (2.8%)
- United Kingdom: $24.5 billion (2.3%)
- France: $24.4 billion (2.3%)
- Singapore: $24.2 billion (2.3%)
- Thailand: $22.3 billion (2.1%)
- Taiwan: $21.3 billion (2%)
- Belgium: $18.8 billion (1.8%)
( Source of this part : Crude Oil Imports by Country, by Daniel Workman, internet
link : http://www.worldstopexports.com/crude-oil-imports-by-country/ )
Oil and Gas Industry Situation of India in nutshell:
The oil and gas industry in India dates back to 1889
when the first oil deposits in the country were discovered near the town
of Digboi in the state of Assam. The natural gas industry
in India began in the 1960s with the discovery of gas fields in Assam
and Gujarat. As on 31 March 2018, India had estimated crude oil
reserves of 594.49 million tonnes (MT) and natural gas reserves of
1339.57 billion cubic meters (BCM).
India imports 82% of its oil needs and aims to bring that down to 67% by 2022 by replacing it with local exploration, renewable energy and indigenous ethanol fuel. India was the third top net crude oil (including crude oil products) importer of 205.3 Mt in 2018.
( Source of this part : Wikipedia as on 11-Feb-2021, internet
link : https://en.wikipedia.org/wiki/Oil_and_gas_industry_in_India )
As shown above right now India imports
about 82% of its need of oil, though it targets to reduce it to the level of
67% by 2022, by enhanced production of Crude Oil through exploration; and by production
and use of energy sources alternative to hydrocarbon fuels ( common Petrol and
Diesel ).
It would also be worthwhile to mention where from around the globe, India has been importing its huge Crude Oil imports, as mentioned here below.
Crude Oil Imports into India:
Below listed, are the top 15 supplying
countries from which India imported the highest dollar value worth of crude oil
during 2019. ( Within parenthesis is the percentage change in value for each
supplying country since 2015 ).
- Iraq: US$21 billion (up 86.9% from 2015)
- Saudi Arabia: $20.5 billion (up 38.3%)
- United Arab Emirates: $9.9 billion (up 59.1%)
- Nigeria: $9.5 billion (up 2.4%)
- Venezuela: $5.6 billion (down -16.1%)
- Kuwait: $5.1 billion (up 11.4%)
- United States: $4.5 billion (up 28.84%)
- Mexico: $4.3 billion (up 139%)
- Iran: $3.5 billion (down -15.8%)
- Angola: $2.9 billion (down -6%)
- Malaysia: $1.8 billion (up 24.3%)
- Algeria: $1.51 billion (up 599.7%)
- Russia: $1.47 billion (up 1.967%)
- Kazakhstan: $1.3 billion (up 462.1%)
- Qatar: $1.1 billion (down -25.6%)
The listed 15 countries shipped 91.9% of all Indian crude
oil imported in 2019.
Among the above countries, the fastest-growing suppliers of crude oil to India
since 2015 were: United States (up 28.84%), Russia (up 1.967%), Algeria (up
599.7%) and Kazakhstan (up 462.1%).
Countries that experienced declines in the value of their crude oil supplied to
Indian importers were: Qatar (down -25.6%), Venezuela (down -16.1%), Iran (down
-15.8%) and Angola (down -6%).
Overall, the value of Indian crude oil imports appreciated by an average 41.4%
from all supplying countries since 2015 when crude oil purchases were valued at
$72.4 billion.
( Source of this part : Crude Oil Imports by Country, by Daniel Workman, internet link : http://www.worldstopexports.com/crude-oil-imports-by-country/ )
It is confirmed from
the above price trend that during the years from 2012 to 2014, the Crude Oil
price had remained at the level of USD 120-125 per Barrel. There has been a crash
down of the Price of Crude Oil from 2014 onwards and it continues on close vicinities
of that level ( with even a greater dip in the year 2020 though it was short
lived within that year during the Covid-19 pandemic). During the years from 2014
to 2021 (the Crude Oil Price has remained within the range from USD 50 to 60
per Barrel, though in 2016 it had dipped to the level of USD 40 per barrel for
some time during that year, in the year 2018, it had also reached the level of USD 80
per barrel for a short period and also had a greater dip to the level of USD 20
per barrel during the Covid-19 pandemic in 2020. As on February 2021 (right now),
the Crude Oil price is at the level of close to USD 58 per barrel level. It is
an accepted fact without much dispute that since post peak from 2014 onwards, the average price of
Crude Oil, thus has been hovering in the close vicinity of the range from USD
50 to 60 per barrel. ( to note: the price displayed graphically in the above
chart is inflation adjusted ).
It would be interesting to look at the retail prices (price to consumers) of Petrol and Diesel in the four largest metro cities of India since 2012.
PETROL PRICE IN THE FOUR LARGEST METRO CITIES IN INDIA (Rs/Liter).
|
DIESEL PRICE IN THE FOUR LARGEST METRO CITIES IN INDIA(Rs/Liter).
|
Date |
Delhi |
Kolkata |
Mumbai |
Chennai |
|
11-02-2021 |
78.03 |
81.61 |
84.94 |
83.18 |
|
14-03-2020 |
62.58 |
64.91 |
65.51 |
66.02 |
|
31-05-2019 |
66.51 |
68.27 |
69.69 |
70.31 |
|
29-05-2018 |
69.31 |
71.86 |
73.79 |
73.18 |
|
16-05-2017 |
54.9 |
57.23 |
60.47 |
58.07 |
|
17-05-2016 |
51.67 |
54.1 |
56.81 |
53.09 |
|
16-05-2015 |
52.28 |
56.85 |
59.86 |
55.74 |
|
07-06-2014 |
57.28 |
61.97 |
65.84 |
61.12 |
|
23-05-2013 |
49.69 |
53.97 |
57.17 |
52.92 |
|
24-05-2012 |
40.91 |
43.74 |
45.28 |
43.95 |
( Source of Price information from 2012 to 2020 : freefinancial; internet link:
https://freefincal.com/india-petrol-diesel-historical-price-data/
and the source of Price information on
11-02-2021, Good Returns; internet link:
https://www.goodreturns.in/petrol-price.html
)
The Petrol and Diesel price shown above since 2012 ( to make it consistent with the Crude Oil Price chart showing its price since 2012) for the four-largest metro cities of India are good enough representations of the movement of Price of Petrol and Diesel in India, as the other locations would have similar movement depending on the local taxes and duties applicable as applicable in different states, without too much gaps among them. The fuel oils such as Petrol and Diesel are taxed separately by both the Central Government by Excise Duties and the State Governments by VAT ( Value Added Taxes ) as applicable to the States ( the old Excise duty and Vat taxing has still not been changed to GST for the Fuel Oil Sector ). The Petrol and Diesel are mostly marketed by the Public Sector Oil Companies ( Government owned Oil Companies such as Indian Oil Corporation, Hindustan Petroleum Corporation, Bharat Petroleum Corporation, Assam Oil etc.) while there are a couple of Private Sector Oil companies in the business led by the giant Reliance Industries, by a Dynamic Pricing system for the retail market that is the Price to Consumers of Petrol and Diesel.
The observation is clear from the chart and data presented above, that the Crude Oil price had crashed from the level of USD 120-125 per barrel (from the price existed during 2012 to 2014) to the level of USD 50-60 per barrel and with, on an average price decrease of 50-60% per barrel ( from 2015 to 2021-Febrary up to date). The Larger dips in 2016 and 2020 in Crude Oil price was further boon though relatively for shorter time periods. Thus comparing from USD 120-125 per barrel (during 2012-2014) with USD 50-60 per barrel (from 2015 to 2021-Feb), what it shows is a crash of Crude Oil Price by 50-60%. It was there in 2018 a hike (an unexpected spike) suddenly; there was a short lived increase to the level of USD 75-80 per barrel however it had disappeared quickly, bringing back the price to the zone of USD 50-60 per barrel.
However, the Price of Petrol and Diesel to the Consumers in India, does not show such behaviour in terms of any price reduction to the consumers by passing on the benefits of price crash of Crude Oil internationally, as the variation in terms of price decrease allowed in the Price of Petrol and Diesel has been only in the range of 5-7% Approximately ( minor difference location wise is not very significant for reasonable analysis, it has to be rightly considered ). The entire savings out of Crude Oil price crash have not been passed to the consumers ( the public ) directly through Petrol and Diesel pricing, in stead, through levy of various Excise Duties and Vat both by Central Government of India as well as the different State Governments as taxed by them, the prices of the Petrol and Diesel have been either kept same, small decreases due to public outcry, or and most of the times it has been increased upwards. The bigger casualty has been the Diesel in the process as the bigger price gap between the price of Petrol and Diesel that was kept earlier has been closed to the closer vicinity of the price of Petrol. Such pricing of Petrol and Diesel have been kept primarily due to the policies of the Governments at the Centre and the States for reasons of meeting Development Expenditure need, Running Expenditure need and need for Infrastructure Development or to keep control over pollution ( by discouraging consumption of hydrocarbon fuel by high prices ), that is not being argued and contested in this article in any manner and it should not be misunderstood by any one (disclaimer to that effect). What is visible and observed clearly is that the large savings out of Crude Oil price crash after 2014 until today, has not been passed to the consumers fully by keeping the prices same or with minor decreasing under public outcry or increased; due to prevailing policies in force and in other words, the said huge savings have been consumed within the system of the economy of India.
There was a greater dip in the price of Crude Oil even to the level of USD 20/barrel during the Covid-19 pandemic and actions of Lock Downs and movement restrictions everywhere in the World and slowly the price of Crude oil has moved upwards as the lock downs and movement restrictions have been eased around the globe and now as on February, 2021 the Crude Oil price has again reached USD 58 per barrel approximately. During the post lock down upward movement of the Crude Oil price, the Fuel Oil price of both Petrol and Diesel is showing much greater movement upwards and this is giving signals of concern. While the Crude Oil price is at the level of USD 58 per barrel, the Price of Petrol at Mumbai in India has reached Rs 94.36 per liter in February 2021( as on 11-Feb-2021 ) which was Rs 75.57 in March 2020 ( on 14-Mar-2020 ) a year back during the period prior to Covid-19 effect; that shows approximately an increase of 25% in one year time. Similar is the price movement upward for Petrol in other metro cities or other locations throughout India may be with non-significant or minor variations in crease of 25% due to differential taxation levels among the states. Similarly, the Price of Diesel at Mumbai in India has reached Rs 84.94 per liter in February 2021( as on 11-Feb-2021 ) which was Rs 65.51 in March 2020 (on 14-Mar-2020) a year back during the period prior to Covid-19 effect, approximately an increase of 30% in one year time and similar increase in the Price of Diesel has taken place in other locations of India ( minor and insignificant variation in increase % is considered due to difference in taxation in different States ).
The serious cause of concern is, after the Petrol price reaching Rs.94.36 per Liter and Diesel price reaching the level of Rs 84.94 per Liter in Mumbai and other locations of India reaching similar comparable heights in Petrol and Diesel prices (depending on local taxes and duties in different states ), how far more these prices can be driven upwards and the consumers (the pubic) can afford to sustain the price increase in the petroleum fuel. The present prices of Petrol and Diesel ( Rs. 94.36 and Rs. 84.94 per liter respectively at Mumbai ) are record heights of the price and beyond such prices, the public may be hard pressed to sustain. The Petrol and Diesel prices have great bearing and contribution to the price factors of all Goods and Services in the economy having multi-tier and multiplier effects as transportation cost of movement of passengers and goods as well as services consumed in the economy. More the petroleum fuel prices, it will therefore build greater inflationary pressure in the economy and the public would be very hard pressed out of the inflationary pressure.
If the situation is so hard pressing in terms of Petrol and Diesel prices right now while the Crude Oil price has just reached USD 58 per barrel, how can the situation be managed and kept under control if the Crude Oil price moves further upwards? The price of the Crude oil can move forward with greater speed, it can do that, it has done so in the past (looking at the figures of 2012 to 2014 or such behaviours in further past ). The Corollary Answer could be if the Crude Oil price moves further upwards, either the Governments ( the Central and State Governments put together ) have to sacrifice in the components of taxes and duties that will handicap them in terms of revenue they have been using within their activities whatever; or the public (consumers) have to bear the burnt by being forced to pay a much higher price increase in Petrol and Diesel which will put lot of inflationary pressure on the economy non-sustainably. Under such anticipated circumstances which can not be ruled out, the thought of Creating a FUEL PRICE STABILIZATION FUND as a proactive measure should be a good idea.
Let me explain, by Fuel Price Stabilization Fund, what I mean. At National level a Fund can be created to assist the Nation at the time of undue upward price movement of Crude Oil. Today, India’s import of crude oil as mentioned above is 82% of its total need of oil (primarily used as hydrocarbon fuel or Petrol and Diesel) which the Indian Government has planned to reduce to the level of 67% by 2022 through more exploration and domestic production of Crude Oil which is being done primarily by ONGC ( Oil and Natural Gas Corporation ) and Oil India and by production of alternative energy sources like Ethanol, Solar Energy and Renewable Energy that can replace Petroleum Fuel(Petrol and Diesel etc.). However, even for a while, assuming that this target is met, still India will be dependent for 67% of its Crude Oil need on Imports from World Market. The 67% dependence on imports of Crude Oil is a huge burden, that is almost USD 68 billion value as on today ( based on the fact that in 2020 the India’s Crue Oil imports was worth about USD 102 billion, a 41.4% hike over the USD 72.4 billion worth of crude oil imports in 2015 ). In reality, while the consumption of fuel is going to increase over time, meeting even 67% of it by imports is a huge burden and can be anticipated to create very difficult circumstances if the Crude Oil price moved to further greater heights. A Fuel Price Stabilization Fund if created and maintained diligently, it can help the Nation in facing unprecedented difficult situation that may arise out of the excessive upward movement of the Crude Oil price and at the same time by the help of this fund, the consumers (Public) may not be burdened too much to pay a further hefty price for the Petrol and Diesel that can distort the behaviour of the economy dangerously.
How the Fuel Price Stabilization Fund would be used if created. The proposed mechanism to use such a Fund is to contribute from the fund at the time when the Crude Oil Price is at higher level and to replenish the Fund with the savings, when there is saving out of the low level Crude Oil price. Then someone can ask where the money for such a Fund can come from? If a big country like India which has such a bigger consumption of Petroleum Fuel wants to create such a fund for its National safety, it will find a way out to create such a Fund. Once the idea of creating such a fund is adopted and put into action, the Nation will be able to find a way to create such a fund. There are calculations to be made and arrived at what size of a fund can be helpful to assist the nation in bad days of Crude Oil pricing. The Crude Oil price, when considered, has much greater fluctuations over time. When the price shoots up to greater heights it will stay for 2-3 months ( or some period to say as example ) and again come back to some plane and may have a greater dip also due to some reasons globally on which a Nation can’t have individual control. However, if such a Fuel Price Stabilization Fund is available, it becomes handy in the bad days when the Crude Oil price moves to greater heights. The basic principle will be to spend from the Fuel Price Stabilization Fund during the bad days when the Crude Oil price moves to greater heights and to replenish the said fund from the Savings made during good days when the greater dips in Crude Oil prices do take place.
I used the case of India as an example as I said as its case is at my easy reach as I live in India. However, the principle of creating a Fuel Price Stabilization Fund could be relevant and much helpful for any other Nation who have nagging burdens of Crude Oil Imports and will be always affected if the Crude Oil price moved greatly upwards.
Therefore, creation of a FUEL PRICE STABILIZATION FUND should be a good idea, the sooner the Nations like India or any other nation can like it, is put into action should be better in the national interest.
About the Author : Dr. Nimain Charan Biswal is a
B.Sc.(Agri. Science and Technology), M.B.A. and Ph.D.(Management Area ) by
qualifications and he has 35 years of work experience in both industrial
and development sectors in diversified fields of social importance. He has been
educated at Orissa University of Agriculture and Technology (OUAT)-Bhubaneswar,
Institute of Rural Management Anand (IRMA) and Gujarat University (with
Resource Support of IIM-Ahmedabad). Dr.Biswal is further educated at
IIM-Calcutta, XLRI-Jamshedpur, Apple Computer Industries and Spar Inc., USA. He
has worked for reputed National and International Organisations in Senior/Top
Management Capacities. He is a management expert covering extensive areas
from management in agriculture, industrial management, development management
to management of public systems. He is a prominent professional of India and
known Internationally as well. He lives at Mumbai in India.
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