Rise in crude oil prices: What does it entail?

The rise in crude oil prices to more than Rs. 73 per litre in India is pinching Indian commercial and passenger vehicle owners hard. There are two major causes for the rise in crude oil prices; one, the decision of OPEC to cut crude production to prevent fall in crude oil prices, and second, the drop in drilling activity in the US due to which the US crude oil output has dropped. There is also speculation that the US is likely to impose sanctions in West Asia, which has added fuel to the fire of rising oil prices. All these factors taken together will harden the oil prices further in the coming few months, and India being a major oil-importing country, will feel the pinch harder.

The rise in crude oil prices holds significant implications for India. Higher crude oil prices will increase India’s import bill of crude oil, thereby widening the trade deficit further. The most serious impact of rising crude oil prices would be on prices of consumer goods and services. The cascading effect of the oil price rise would cause the prices of goods and services to go up and, as a result, inflationary spiral is likely to be set into motion. This will negatively impact the overall economy.

Now, the government needs to take measures to reduce the adverse impact of oil price rise on the economy. The government can and should reduce the excise duties levied on petrol and diesel during the last three years or so. The government had increased excise duties nine times since 2014 when the crude oil prices had touched US$ 30 per barrel and thereby deprived the consumers of lower crude oil prices. Now that the prices are increasing, the government would do well to do away with the flab of excise duty and maintain the prices of petrol and diesel at reasonable levels.