Earlier this week, US crude futures crashed into a sub-zero level – a historic development, for never did crude oil price hit a negative territory. What that meant was that oil producers had to pay the buyers to take the commodity off their stocks amid fears that storage capacity could run out in May. The phenomenon in part could have resulted from a technicality embedded in trading of oil futures. May futures contracts were due to expire Tuesday and traders were keen to offload holdings to avoid having to take delivery of the oil and incur storage costs. The situation, however, turned around before long. Nevertheless, the negative price of oil reflected the utterly gloomy outlook presented by the coronavirus pandemic for the world. An agreement by members of the Organisation of the Petroleum Exporting Countries (OPEC) earlier this month on a 10 per cent cut in global output proved too little to cushion the impact. The pandemic-induced lockdown has scuppered all types of movements. Worldwide the demand for oil has dried up. Storages are full. Acquiring fresh crude would mean hiring more tankers. This is the reason oil producer wanted to get rid of their existing stocks as they did not want to pay more demurrage on their existing holdings or spend on storage.
Brent crude oil price has dropped to $20 a barrel, principally because the outbreak of COVID-19 and the consequent decline in economic activity have destroyed demand in large parts of the world. Common sense would say low crude prices are to the advantage of India as 85 per cent of our oil demand is met by imports. But the Indian economy, already in the grip of a recession before it was ravaged by the pandemic, is not in a position to take advantage of the drop in crude oil price. The domestic consumption of oil in the country has fallen by over 60 per cent. In fact, the slowdown in domestic consumption of petroleum products had begun in 2018-19. But the pace of the slowdown will accelerate now with industrial activities having already come to a halt courtesy the nationwide slowdown. The consumption of petrol and diesel in April has come down by 60 per cent. Given that the International Monetary Fund (IMF) has forecast a 1.9 per cent growth in 2020-21, the recovery in oil demand will be slow.
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A telling impact of the cheap crude price will be on the revenue of the Centre and the state governments. While India’s import bill will come down on account of the drop in crude prices, this gain will be offset by a similar drop in exports of petroleum products. Therefore, we may not expect a huge gain on our current account. The excise revenue, levied by the Centre on petroleum products, will be hit because of lower consumption of oil in the country. For the states, the collection of sales tax and VAT on petroleum products will suffer as these are linked to the price of the products. As the price has declined, the revenues will take a hit. Therefore, the implications of the fall in crude rates for the Centre and the states will be dire. The government is likely to increase the excise duty to divert the oil refiners’ gain courtesy the fall in crude prices. It had done so in March. Given the tight finances now, the government is likely to raise the excise duty on petroleum products now. All in all, the impact of the coronavirus on the economy will be so humongous that even a historic fall in global oil prices, which in formal times would have been a time for celebration in India, has brought in new challenges for the government.
