Global oil prices have dropped sharply to less than half their peak level of $147 a barrel reached in July this year. The rapid decline is attributed primarily to a major slowdown of economic growth in the United States and other developed countries leading to reduced consumption. With most of their economies already in recession or about to tip into it, the demand for petroleum products is expected to remain weak. Moreover, there has been a fundamental shift in consumer habits. For instance, automobile users in the U.S. have abandoned their age-old preference for fuel-guzzling vehicles in favour of smaller, fuel-efficient cars. Such changes in consumption patterns suggest that even when their economies recover, the growth in demand for oil will be less robust than before. Significantly, a recent decision of the OPEC countries to reduce the daily output by as much as 1.5 million barrels failed to stop the free fall in oil prices. However, demand from China and India will remain strong. Their economies are expected to slow down but still do reasonably well. An important consequence of falling oil prices for the global economy has been the lowering of inflationary expectations. Since the sharp drop in petroleum prices has been matched by similar declines in the prices of many other commodities, monetary authorities and governments who are grappling with a grave financial crisis have at last found one reason to cheer about.
For India, inflation — still in double digits — remains a major concern. However, the RBI has a greater leeway to focus on other monetary policy objectives such as spurring economic growth. The Indian crude basket price has gone down below $60. The price of aviation turbine fuel has been reduced and there is an expectation that the government will lower the administered prices of petrol, diesel as well as cooking gas and kerosene. While that should provide respite to consumers, it is still not clear how the public sector oil companies will benefit. A few of them, including Indian Oil, have reported huge losses during the second quarter, which they attribute primarily to “under-recoveries” in selling the controlled products. The declining global oil prices might have given policy makers an unexpected opportunity to find an equitable solution to the vexatious issue of administered prices. The B.K. Chaturvedi Committee’s report had suggested a transparent and equitable pricing method outside the ambit of government decision-making. However, considerations other than hard-headed economics go into the pricing of petroleum products and with elections round the corner, it is highly unlikely that the government will opt for any radical change in pricing.