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Why oil prices are so high in India?How and why should India achieve “End of oil-age”?

Adding to the already high stress on the economy due to technical recession and inflation, OIL MARKETING companies have hiked the prices of petrol and diesel by over Rs. 2 and by nearly Rs. 3.50, respectively, since November 19, after a period of 59 days when prices were held static.

Why oil prices are so high in India?

The retail price of oil in India is made up of multiple components i.e., Global crude oil prices + Margin of transportation and refining + Central Excise Duty + Dealer’s Commission + State VAT (Value Added Tax). Fluctuation in the final price of oil in India can be caused by any of these components.

However, India’s retail fuel price is one of the highest among its neighboring countries. Following are some of the factors contributing to high prices in India:

Firstly, India is heavily dependent upon imports for its oil requirements. India is the third-largest oil consumer in the entire world, with 84% of it being imported. Any major fluctuation in the international Crude prices due to events like Iran sanctions or the Syria war directly impacts oil prices in India.

Secondly, high excise duty by center and VAT by states on petrol and diesel is the most important factor behind high oil prices in India. Taxes make up for nearly two-thirds of the retail selling price. During lockdown even though International crude oil prices crashed sharply but oil prices kept on increasing as the government imposed additional duties and cesses on oil to generate additional tax revenues. In Short, the tax rate on fuel in India is highest compared to any other country in the world.

Thirdly, Under the present dynamic fuel pricing system fuel prices are getting revised on a daily basis. Thus, any hike in the international market is getting reflected immediately.

Fourthly, As mentioned above too, India is import-dependent for its fuel requirements, thus the exchange rate also plays an important role in determining the fuel prices. Depreciation of the Rupee against the Dollar will increase the volume of Rupee required to make payment in terms of Dollars.

How India can end the oil age?

The oil age is over a hundred years now since 1911 when Winston Churchill as minister of the navy decided to convert the British naval fleet from coal to oil.

End of Oil age is the theory first formulized in 2005 that said oil age will end due to the fall in production of oil and non-replacement of it along with skyrocketing prices. But the theory was reversed recently after the US Shale gas revolution and the emergence of Electric vehicles after Paris Climate Summit, and now advocates that all these developments will make oil obsolete(due to falling demand) within few decades of Peak Oil demand.

There is no consensus on the timing of peak demand. For instance, While BP believes, it has already peaked; the International Energy Agency (IEA) projects it will peak by 2028.

However, India needs to create its own strategy to bring an end to Oil age in the country. Following suggestions can be adopted for the same;

  • India must develop its own world-scale, competitive, manufacturing systems for photovoltaics (PVs) and battery storage to provide affordable solar units and reduce dependence upon countries like China.

  • India must prepare a clean energy technology strategy to identify relevant “breakthrough technologies”, establish the funding mechanisms and create the ecosystem for International and domestic partnerships.

  • Speedy migration to electric mobility as the transport sector accounts for around 70% of the total diesel consumption. This would require effective incentives in the form of subsidies and infrastructure to promote electric buses. Dedicated electric corridors for trucks could be planned.

Why India should end the oil age?

Firstly, Vehicular pollution caused by Petrol and diesel-based vehicle account for 40-80% of total air pollution, it is also one of the reasons behind high NCR air pollution, for which initiatives like odd-even scheme and BS-VI were implemented. India has been at the forefront of environmental protection initiatives like the Paris Agreement to shift the global energy system away from fossil fuels. thus, phasing out fossil fuel is the need of the hour.

Secondly, Oil is one of the heaviest burdens on India’s exchequer. India spent USD 111.9 billion on oil imports in 2018-19, up from USD 87.8 billion in the previous fiscal year.

Third, over-dependence on imports for crude oil is also weakening Indian currency. Since oil is procured by making payment in US dollars, in case of price rise, India needs to ensure sufficient availability of Dollars in exchange of Rupees, which results in depreciation of Rupee. 1991 balance-of-payments crisis in India was caused by Oil prices increase and unavailability of Dollars in sufficient amount.

Fourth, the depreciation of the rupee together with rising oil prices leads to high prices of commodities, which results in inflation.

Fifth, over-dependence on imports also affects India’s foreign policies to maintain a sufficient supply of oil. India’s foreign policy towards Middle-East and West Asia is largely affected by oil requirements.

For countries like India moving away from oil is not going to be easy like its developed counterpart. India needs some time and decreases in global fuel prices in the near future so that this transition becomes easier for India.


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