[op-ed snap] The oil risk

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Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: OPEC

Mains level: The newscard discusses the rising crude oil prices and its effects on India.


News

What is the issue?

  1. Crude oil price is about at about $70 a barrel, marking a four-year high and a price increase of close to 6% since the start of the year
  2. The rise in international prices has been particularly sharp given that oil had been selling at below $45 in June
  3. This is an increase of about 55% in a matter of just months

Reason behind this up and down in prices

  1. Oil price dynamics have often been explained by changes in the supply outlook influenced by the decisions of major oil producers
  2. But the recent spurt in oil prices, however, seems to be more the result of a weakening of the U.S. dollar than anything else

Effect of high prices on OPEC countries

  1. Oil trading at $70 should offer some respite to traditional oil producers like the OPEC members, which have suffered the onslaught of U.S. shale producers

Effect of oil prices on India

  1. Consumers in India are already beginning to feel the pinch as petrol and diesel prices have hit multi-year highs
  2. The retail selling price of both petrol and diesel in Delhi, for instance, has risen by close to Rs. 3 a litre since the beginning of 2018

What should be done from the government side?

  1. As rising oil prices put pressure on domestic consumers, the government will have to desist from resorting to subsidies to ease the pain
  2. It should work towards rationalising taxes on petrol and diesel to bring down retail prices
  3. This will help consumers without imposing an undue burden on the oil marketing companies

Effect of oil prices on India’s fiscal

  1. With the fiscal windfall from low oil prices likely to end for now, the government should think for the long term
  2. And make crucial tweaks to its hydrocarbon exploration and licensing policy to expedite oil discovery and production
  3. Simultaneously, it must take a leaf from China’s book and actively support Indian energy firms’ bids for overseas oilfields
  4. Self-reliance is ultimately the best hedge
Oil and Gas Sector – HELP, Open Acreage Policy, etc.
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