Politics, Not Economics, Will Shield Automakers From High Fuel Prices

Murali Gopalan
20 Sep 2023
02:39 PM
3 Min Read

As crude oil gallops towards the $100/barrel mark, auto fuel prices should logically rise too but the imminent state and national elections will prevent this from happening.

high fuel prices mobility outlook

Oil is on the boil again with prices surging to $95/barrel and threatening to touch the $100 mark with both Russia and Saudi Arabia expected to cut output in the following weeks.

With over 80% of its crude oil requirements being met from imports, India will be badly hit and a heftier bill will play havoc with its balance of payments position. Worse, the rise in prices should logically lead to a corresponding rise in auto fuel prices.

However, that is not likely to happen with critical state elections around the corner (Rajasthan, Madhya Pradesh, Chhattisgarh and Telangana) followed by the bigger Lok Sabha polls in mid-2024. Then come the elections in Maharashtra and Andhra Pradesh which effectively means that the Centre is not going to take any chances antagonising the voter.

With households across the country grappling with food inflation coupled with high prices of cooking gas and auto fuels, the last straw for them will be yet another price hike. As has been the case with every other government’s knee-jerk reaction in previous elections, the ruling BJP will not upset the applecart which means that politics will prevail over economics.

While ensuring that the end-buyer will be spared of this added cost burden, there is another fall guy who has to take on this blow and, once again, this will be the public sector oil companies comprising IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation.

Never mind that oil prices have been deregulated many years ago and market forces should logically take over. When it comes to high stake battles like elections, every little bait matters in wooing the voter. “There is just no way a price hike will be contemplated at this point in time and all that the oil  industry can hope for is that crude prices will fall in the coming weeks,” says an official.

Compensation Formula

During the time of price control, the Centre had an elaborate compensation mechanism formula for the refining and marketing companies. The first part involved their richer upstream counterparts like the Oil and Natural Gas Corruption and Oil India — which typically made a killing on high crude prices — to share the spoils with them. Any balance would be squared up by the Centre but on most occasions, this was not a complete compensation which meant that the trio of IOC, BPCL and HPCL still took a hit in their books.

Things got really difficult in some years as during 2007-08 when global crude prices shot up to levels of $150/barrel and the oil refiners literally ran out of cash. Reports began doing the rounds that some would even cut back operations which meant that supplies of auto fuels and cooking gas would have been severely hit. It was a very trying period and, fortunately, the fall in crude oil prices that followed some years later emboldened the Centre to deregulate oil prices.

Yet, this move remains only on paper especially when it involves elections and the last thing any government wants to do is to tinker around with fuel prices. The justification is that the consumer needs to be insulated from a price shock but this concern typically mounts only during election time, something that the voter is only too aware of and has no reason to complain about either!

Automakers will also be heaving a huge sigh of relief because costlier petrol and diesel will only impact vehicle sales at a time when the economy has bounced back to a large extent from the aftermath of COVID. Despite this welcome turnaround, the tepid sales in the entry-level segments of both cars and two-wheeler clearly indicates that all is not well with rural India.

Livelihoods have been severely affected and the erratic rains in recent times means that disposable incomes have taken a toss too. Two-wheeler manufacturers have already gone on record to say that the tepid response in the entry-level segment is also a result of cost levies imposed towards safety and emission fitments.

Any fuel price hike at this point in time will only be tantamount to adding fuel to the fire, something which will not go down well with customers and clearly a no-no for the Centre with a spate of elections to contend with.

Comforting Reality

Even while public sector oil marketing companies will bear the brunt of absorbing the losses incurred as a result of keeping prices unchanged at the retail level, they will derive some comfort from the fact that they made healthy profits during Q1 with a similar showing expected in Q2 also. “It is only during Q3, when they absorb losses, will they face some pressure on their balance sheet while the final quarter will be a washout,” says an oil company executive.

Not all could be doom and gloom though, he adds, since oil is essentially a political commodity where the whims and fancies of (oil) producing nations has a greater say in price movements. “With winter approaching in the West, this is the best time for them to make a killing which explains why production cuts will happen and this is nothing new. Prices will cross the $100/bbl mark very soon but could even settle around the $80 mark by February 2024,” continues the executive. Either way, the auto industry and the Indian customer will be relieved for the next eight months at least.

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