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HomeEconomyOil price war truce ending short-lived relief of low petrol-diesel prices

Oil price war truce ending short-lived relief of low petrol-diesel prices

Indian consumers had been relieved only marginally as their governments absorbed the price difference caused by Saudi-Russian oil price war to fund welfare schemes for the anti-coronavirus lockdown-hit economy


Saudi Arabia now wants an emergency meeting between the Organisation of Petroleum Exporting Countries (OPEC) and its allies led by Russia to end the crude oil price war, as US President Donald Trump mounts pressure on both sides to patch up. The plummeting crude oil prices had threatened American shale oil producers even as the end-users like personal and commercial vehicle owners were enjoying the ride as long as the Saudi-Russia tussle lasted.

On 11 March, the world’s largest oil company Saudi Aramco had announced an increase in production of crude oil. In the price war with Russia — that had refused to curtail its production on the request of OPEC — Aramco said it was increasing its production capacity by 1 million barrels a day.

Saudi Ministry of Energy had directed Aramco to increase the production of crude oil from 12 million barrels to 13 million barrels a day. The company posted this information on the Saudi Stock Exchange.

No relief for oil consumers in India

In a country like India, of course, consumers did not get much of a relief as the state absorbed the difference in the form of increased VAT and excise duty in the wake of a lot of taxpayers’ money going into welfare schemes and concessions in view of the anti-coronavirus lockdown.

While research firm Rystad Energy said the global demand for crude oil was almost 23% lower this month than it was a year ago, the retail selling price of petrol and diesel increased in Indian states of Maharashtra, Karnataka, West Bengal, etc, yesterday. These state governments increased their VAT rates on both products on 1 April. “OMCs have made no change to the basic selling price and have maintained it at the same level,” state-run Indian Oil Corporation (IOC) said in a statement.

Earlier, on 14 March, the union government had raised the excise duty on petrol and diesel by Rs 3 per litre, aiming at additional of around Rs 43,000 crore. The special excise duty went up by Rs 2 and road cess by Re 1 per litre each of petrol and diesel.

Today, the price of petrol in Mumbai and Kolkata was seen at Rs 76.31 a litre and Rs 73.30 a litre. On the other hand, diesel prices were seen at Rs 66.21 and Rs 65.62 a litre respectively.

Early in the first term of Prime Minister Narendra Modi, Indian consumers had been deprived of the falling international oil price because the government was then charging a higher excise duty to finance its highway-building programme.

A different scenario for US shale

President Trump said on Twitter today that he had spoken to Saudi Arabian Crown Prince Mohammed bin Salman (MBS). The president said he was optimistic that Riyadh and Moscow would work towards an agreement to cut production by up to 15 million barrels per day (bpd).

“…..Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!” Trump tweeted.

Prices surged more than 30% with the tweet. International benchmark Brent crude touched $ 32.78 a barrel while the price of US oil West Texas Intermediate became $ 26.93.

However, not all are convinced the truce will work out. “Taking 10 or 15 million barrels off the market could be way beyond the kind of deal OPEC is capable of making,” Gregory Gause, Head of the International Affairs Department at the Bush School of Government and Public Service at Texas A&M University, told Al Jazeera. “There is a perverse incentive built into any large scale deal that President Trump is talking about.”

“It would be remarkable. That means the Saudis taking 3 to 4 million barrels off the market, Russians about 2 million, and it requires getting a lot of other people on board. Everybody taking drastic cuts sets up a circumstance where lots of people have the incentive to cheat on whatever quotas they accepted in the deal,” Gause said.  

If the prices were to double from $ 20 to $ 40 a barrel, it would still not be great for a lot of countries that have a breakeven price above $40 a barrel, Gause said. 

Prices did rise a little in the US when it got the news. West Texas Intermediate crude, the US benchmark for oil, rose by 19.3% to back above $ 24 a barrel. 

Elsewhere, oil prices nosedived by about 70% also because of the global coronavirus pandemic and lockdowns across countries. Saudi Arabia and Russia got into a tiff in the middle of the rampaging respiratory as Riyadh failed to persuade Moscow to back deep oil output cuts.

Saudi Arabia then pushed production up, flooding the world markets already overflowing with crude oil. This hurt both Saudi Arabia and Russia but US shale producers suffered the most. The American oil firms borrowed heavily to drill new wells to play catch-up.

That was when President Trump began speaking to the Saudis and Russians to stabilise the oil market. But he will take measures on the domestic front too. Tomorrow, the US president will meet energy executives to find ways to help the shale oil and gas producers. The US government may impose punitive measures on imports of crude oil from Saudi Arabia.

Further, the US government could increase the on imported Saudi oil. The Trump administration could waive the law that makes it mandatory for US vessels to be used as transport goods between ports, says The Wall Street Journal

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