Iraq crisis fuels crude rise, gives FM a headache

Oil prices could rip apart the fiscal math for Budget.

By: ENS Economic Bureau | New Delhi | Updated: June 20, 2014 9:57:42 am
Oil prices touches 9-month high; could rip apart the fiscal math for forthcoming Budget. (Reuters) Oil prices touches 9-month high; could rip apart the fiscal math for forthcoming Budget. (Reuters)

The international crude oil price of the Indian basket rose to $111.25 a barrel on Wednesday, well above the average price of $105 that the government had estimated for the entire year. The price of Brent crude, the international benchmark, has risen to $114.44 a barrel, a nine-month high.

The rise — fuelled by the crisis in Iraq — could rip apart the fiscal arithmetic that finance minister Arun Jaitley is working on for his Budget FY15. Though about two thirds of India’s oil imports are based on long-term contracts and not daily float rates, the prices are reset at intervals of 30 to 60 days. This means that the rise in the price of the Indian basket will begin to pinch if the Iraq crisis keeps prices up in the next fortnight too, a government official said. India has contracted to import around 19 million metric tonnes of crude from Iraq in this fiscal year 2014-15. Any prolonged supply disruption would lead to major shortages, especially for Indian Oil Corporation, a Platts release noted.

Meanwhile, petroleum minister Dharmendra Pradhan on Thursday reviewed the availability of petroleum products in the country in light of the conflict, according to a statement issued by the oil ministry. In a meeting with senior ministry officials and oil firms, it was “confirmed that there is no possibility of supply disruption at present and adequate supply of petroleum products throughout the country would be maintained,” the statement added.

Data released by the ministry on Thursday showed the price of the Indian basket had begun to rise since June 11. In the previous fortnight, the price had stayed at $106.72 a barrel. In Indian prices, the per barrel difference between the two works out to about Rs 374 — an additional hit of Rs 8,000 crore on the monthly import bill. Deep Mukherjee, senior director, India Ratings, said the geo-political risks would kick in if the prices remained elevated from here on. “I am not sure how much the impact will be right now, but a fortnight later the difference will begin to show,” he said.

The Interim Budget placed by the former government made almost no provision for any flare-up in oil prices. The medium-term fiscal policy statement had instead assumed that global prices would remain soft, and that the oil subsidy bill would come down by a massive Rs 32,000 crore from FY14 to FY15. The fall in the fiscal deficit to 4.1 per cent of GDP was based on this assumption. There is no way now that Jaitley can stick to this assumption. As on June 16, state-run oil marketing firms were incurring a combined daily under-recovery of about Rs 249 crore on the sale of diesel, kerosene and LPG.

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