Surge in oil prices amid Russia-Ukraine conflict

Surge in oil prices amid Russia-Ukraine conflict

Subject – Economy

Context – Rising tensions between Russia and Ukraine are leading to a surge in oil prices, with Brent breaching the $90-a-barrel mark overnight on Thursday — the first time since 2014.

Concept –

• Crude oil prices have risen sharply since the beginning of the year as a surge in Covid-19 cases around the world owing to the Omicron variant of the novel coronavirus has not lowered demand for crude oil in line with expectations.
• Geopolitical tension in the Middle East and fresh tensions between Russia and Ukraine are leading to speculations of supply disruptions. Key oil-producing countries have also kept increasing crude oil supplies despite rising demand.
  • OPEC+ had agreed to sharp cuts in supply in 2020 owing to Covid-induced travel restrictions, but the organisation has been slow to boost production since then.

What is the impact on rising oil prices on Budget and inflation?

• Not only do rising prices feed into inflation, but also increase the amount of LPG and kerosene subsidy the government is required to pay.
• However, on the positive side, government revenues on taxes of oil and related products have also been rising over the last two years.
• The country’s retail inflation, which is measured by the Consumer Price Index, has already risen to a five-month high of 5.59 per cent in December. Wholesale price index-based inflation rose to 13.56 per cent during the same month.
• High inflation will force the government to cut taxes on oil and related products, especially since rising prices are a key factor ahead of upcoming Assembly elections in five states.
• The Oil import bill is already up by more than 70 per cent from last year and it affects the balance of payments adversely.
• Prices of petrol and diesel fell in November as the Central government cut excise duties by Rs 5 and Rs 10 per litre respectively. Most states have also reduced Value Added Taxes on petrol and diesel. Since the cut in taxes, Oil Marketing Companies have not revised their prices.