Kamal Ghorui
Even if a long war pushes crude uncomfortably high, GOI must hold retail fuel prices steady to curb inflation
Let’s hope history doesn’t repeat itself. In July 2008, Iran tested Shahab-3, a missile with a 2,000km range that could hit Israel. Within days, oil touched $147 a barrel, a level it has never seen since. As of Tuesday – fourth day of Tehran Tumult – it was still around $80, which is less than the average through 2024. If Trump can end this war in 4-5 weeks, as he’s claimed, we shouldn’t lose sleep over it. One, because our oil marketing companies (OMCs) have huge cash reserves. Their pump prices remained high while crude fell over the last couple of years. In fact, it slipped about 20% to $60 just last year. Two, inflation has been low as well. In Feb, it was at 2.75%, well within RBI’s 4% comfort range. Three, India has many crude suppliers now. It also has fuel stocks to last over two months. And as TOI reported yesterday, govt may ask refiners to prioritise domestic needs over exports while war lasts.
So we’re comfortable, but must prepare for the worst – including the $147 scenario. That’s because the economy runs on oil. Costly oil not only makes your commute dearer but also pushes up freight costs. Since oil’s needed to make things like milk pouches and food wrappers and synthetic yarn, many goods also become costlier. That’s why rising oil prices can stoke inflation, upsetting the math of economic growth.
The year started with expectations of oil sliding to $50 by June amid a glut. Economic Survey saw “no fear of inflationary pressure from oil”. Growth projections were based on this assumption. But studies have shown that a 10% rise in crude can increase inflation in India by 20 basis points. And rising prices are a tax on consumers, who have less money to spend as a result. That saps demand overall.
So, GOI and OMCs must do everything to prevent a price shock. OMCs, especially, have the means to do so for a few months. Once the war is over, crude will hopefully continue sliding towards $50, giving them a chance to recoup any loss quickly. In US, where govt doesn’t interfere with pump prices, petrol was selling for $3 a gallon on Monday, and could reach $3.25 by Saturday. That will worry Trump, who promised $2 a gallon in his campaign. His party faces Congressional polls later this year, so he’ll be wary of further hikes. Which means, he has a strong reason to end the war soon. Regardless, we should be prepared.
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