Analysis: Lower oil prices only an advantage to the super-rich

From Friday midnight petrol prices were slashed by Rs2.41 and diesel was down by Rs2.25 a litre in the capital. Petrol price was slashed by Rs9.36 since its peak in July and diesel by Rs5.60 a litre in the course of merely 12 days. But consider this unfair price distribution: While a construction worker pays more for his potato purchases, an industrialist can fill up his super luxury car for less. The question is: what happened to oil prices which till recently were registering only an upward spiral. 

Crude oil prices are not just falling; they are almost crashing in the blink of an eye. Since, June this year, oil prices started falling bit by bit. But now — in October — the prices are skidding. Current Brent crude — which is a benchmark price for global oil markets — fell to $82.60 a barrel in mid-October from $116 in mid-June. US prices for its benchmark crude dropped to around $79 per barrel. 

Even a month back, oil prices were close to $100 per barrel in the global forward markets. That is last month, if you wanted to enter into a contract with producers for a supply of say 100 barrels of oil in late November, you would have had to pay $100 dollars per barrel for booking that supply. 

Perhaps the most critical reason for the oil price slide can be attributed to the developments in this sector in the US. For the last five years, the US, has been pumping up shale gas in such volumes that the country from being a net importer has turned into an exporter of hydrocarbons. Such is the rapidity with which the shale gas production in the US has increased that it currently accounts for a fourth of US consumption of oil and gas. The rising production has also liberated the US from its dependence on West Asia oil. This has taken the biggest chunk of demand off the global market.

The second factor in slashing oil price has been the slow growth of the global economy after the financial meltdown. The IMF had forecast a slower pace for the global economy in 2015 and 2016. The European countries have been growing far too slowly, if not actually contracting. Above all, China, the second biggest economy in the world, is rapidly slowing down. Falling oil demand from China has aided in depressing global oil prices and moderating the demand for oil.

At the same time, technology was improving the efficiency of fuel use. Concerns about environmental effects of oil burning, resulting in the introduction of stricter oil efficiency norms for the transport sector, have been crucial in checking oil demand. Small cars can now easily reach above 17-18 kms per litre. Progressive taxation is disincetivising the use of large cars. 

Does it mean that we are entering a period of moderate oil prices? Not likely. With lower oil prices there might be complacency and demand for oil might rise.  At lower than $80 per barrel many oil and shale gas fields will become uneconomic. Producers are also talking of cutting back their investments in newer fields. These might bring down supplies. The short-term window for low oil prices should be better used than just by lowering domestic retail prices. This will simply worsen pollution. The lower oil price gives scope for fiscal structural reforms. Government should impose specific duties on oil and regulate them in step with the fall in global prices, to gather enough revenues for introducing the long elusive goods and services tax (GST). The revenues collected should be used for compensating states more than adequately, and bring them around to adopting the GST system. There is no point making oil cheaper and giving discriminatory advantages to the really rich.

The author is a Delhi-based analyst and commentator