The crude truth of Brent
Brent Crude
- Also referred as Brent blend, it is among the major oil benchmarks used for trading oil contracts, futures and derivatives.
- It is the most traded of all the oil benchmarks, and drilled mostly from the North Sea oilfields.
- This oil is sweet and light, easy to refine into diesel fuel and gasoline and its transportation.
Impacts on Indian Economy
Consumer inflation:
- If rising crude prices are transmitted to retail fuel prices, then it will lead to higher inflation.
- It would have lesser effect on retail prices due to absorption by Oil Manufacturing Companies (OMCs) and government, but is above RBI’s tolerance limit.
- Inflation increased to 5.5% than earlier 4.6% due to rise in food prices.
Rise in Dollar demand:
- Rise in oil prices leads to rupee depreciation as higher import bill increases demand for dollars and its value against the rupee.
- Strong dollar index and higher US treasury yields contributed to the rupee''s weakness.
Excise duty cut:
- If rising oil prices are managed through excise duty cut, will hit government revenues (Fiscal deficit-33.9% in 2023).
- It puts pressure on government finances if it reduces excise duty on fuel.
- Central excise duty constitutes around 20% of the petrol price.
- Excise duty collection was 10% lower as compared to 2022-23.
- But windfall taxes can cover such revenue losses.
- Windfall tax: A higher tax rate levied by governments against certain industries that experience above-average profits in favourable economic conditions.
Wholesale inflation:
- Wholesale Price Index (WPI) deflation decreased in July- August, 2023, but it could revert to a y-o-y (year-over-year) inflation due to the surge in prices of fuel and power.
Current account deficit (CAD):
- Costlier crude will lead to higher forex outflow which may widen current account deficit.
- India imported 87.8% of its crude oil requirement in April-July 2023 that led to a rise in barrel price.
Foreign Institutional Investors (FIIs):
- Depreciating currency amid rising CAD will impact foreign inflows.
- FPIs turned net sellers after 6 months of positive inflows.
- Industrial fuels like naphtha, fuel oils, lube oils and natural gas will be hit.
- The profit margins of aviation, paints, tyres, cement, and chemicals will be negatively impacted.
Fall in OMC margins:
- OMCs'' marketing margins will fall due to a continuing freeze in retail prices.
- Average marketing margins of three OMCs (Indian Oil, BPCL, HPCL) are expected to decline by 68.4% and 40.5% for diesel and petrol.
- Upstream oil producers like ONGC and Oil India could benefit due to an increase in oil realizations and Windfall taxes can cap gains.
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