Rising Fuel Prices

  • IASbaba
  • October 20, 2021
  • 0
UPSC Articles
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  • GS-2: Effect of policies and politics of developed and developing countries on India’s interests
  • GS-3: Economy & Challenges

Rising Fuel Prices

Context: The price of crude oil is nearing its highest level since 2018, as the price of Brent Crude breached the $85 per barrel mark by Oct 15th ($42.5 per barrel a year ago). This is happening as the price of natural gas and coal are also hitting record highs, intensifying the energy shortage.

Why are fuel prices rising?

  • Economic Recovery: Global crude oil prices are rising on the back of a sharp increase in global demand as the world economy recovers from the pandemic. 
  • Supply not increasing commensurately: In its latest round of meetings, the OPEC+ group of oil producing countries reaffirmed that they would increase total crude oil supply by only 400,000 barrels per day in November despite a sharp increase in prices. 
    • OPEC+ had agreed to sharp cuts in supply in 2020 in response to Covid-19 global travel restrictions in 2020 but the organisation has been slow to boost production as demand has recovered.
  • Rise in Prices of other energy resources:
    • Supply side issues in the US including disruptions caused by hurricane Ida and lower than expected natural gas supplies from Russia amid increasing demand in Europe have raised the prices of natural gas.
    • International coal prices have also reached all-time highs as China faces a coal shortage that has led to factories across China facing power outages. 
    • A faster than expected recovery in global demand has pushed the price of Indonesian coal up from about $60 per tonne in March to about $200 per tonne in October.
    • Naturally, when prices of these energy resources increase, it will have impact on prices of crude oil as well.

What is the impact on India?

  • High crude oil prices have contributed to the regular increase in prices of petrol and diesel across the country in 2021. 
    • The price of petrol in Delhi is Rs 105.84 per litre in Oct 15th, while the price of diesel is at Rs 94.6 per litre.
  • High fuel prices will feed into increased cost of goods & services causing inflation in the economy.
  • The demand for diesel in India was expected to go up in the next few months with the upcoming festive season set to accelerate the economic recovery and push up diesel consumption. Diesel accounts for about 38% of petroleum product consumption in India and is a key fuel used in industry and agriculture. 
  • Rising Fuel prices can dampen the festive consumption (travel & increased cost of goods) & hurt economic recovery prospects.
  • The increase in gas prices has put upward pressure on the price of both Compressed Natural Gas (CNG) used as a transport fuel and Piped Natural Gas (PNG) used as a cooking fuel. 
  • High international prices of coal have added to a coal shortage at India’s thermal power plants

Way Forward

India and other oil importing nations have called on OPEC+ to boost oil supply faster, arguing that elevated crude oil prices could undermine the recovery of the global economy.

Connecting the dots:

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