Like blood is vital for a human body’s survival, oil is vital for a country to function and operate smoothly.

It
plays an important role in each level from the production, manufacturing to distribution channels. We
know how critical oil is with its omnipresent effects. The landscape of the industry is such that in the
international oil market, there are two kinds of countries. First are net producers, who produce more oil
than they consume. But, not all countries are lucky enough to be sitting on top of gargantuan oil fields.
Therefore, the second kind is of net consumers. They consume or import more oil than they produce.

Until the late 1940s to early 1950s, the industry was majorly controlled by the U.S. It was the biggest
producer and at the same time, the biggest consumer of oil. This predominant control resulted into the
market being a buyer’s market. With other producers of oil being significantly smaller when compared to
the US, it was always able to exercise influence over prices, almost always cutting out a sweet deal for
itself. Next most significant oil producers, Saudi Arabia and Venezuela found this perpetual bullying
frustrating. They decided to come together in a group, which they proudly address as a cartel and formed
what we know today as the OPEC. OPEC stands for ​Oil Producing and Exporting Countries​. OPEC
was a consortium of significant oil producers and exporters outside of the U.S. majorly comprising nations
in the Middle East and Africa. A newly established power in the market had now changed it to a seller’s
market for once and for all.

The dynamics of oil prices has been affected by a multitude of events since. Recession periods, wars,
geopolitical tensions and constant attempts at exploitation have all been a part of this greasy journey. In
the recent past however, two significant events have played a major role in redistributing power in the oil
industry.

First was the U.S. discovering Shale Gas. Of what we need to know, Shale Gas is a rich source of Petrol
and Natural Gas and America has large amounts of it trapped inside. To gain perspective on its
importance, production of oil with the help of Shale, has helped America become a net exporter/producer
from a consumer. It is to be noted, however, that drilling earth, also known as ​fracking,​ to extract Shale is
an environmentally harmful process and has met significant opposition. The silver lining here is that the
US government has currently not provided fracking contracts for populated areas.

Second was, OPEC joining hands with more countries, bringing in more European countries. Among the
new members, the most significant is Russia, alongside some Scandinavian countries. Bringing in Russia
is no indication of an amicable way of settling the fight. This new group came to be known as the OPEC+.
OPEC+ has been responsible for cutting down oil production to stabilize prices giving in to a constantly
decreasing demand.

Two things to note here are. One, this production cut is also responsible for conceding some market
share to the American oil giving a gradual push to the U.S. economy. Second, although, Saudi Arabia is
allowed to invest in the US Market and gain from its profits, Russia is forbidden. This will help us in
forming a link very soon.

The year is now 2020 and the world is already grappling with the CoronaVirus. The society’s health has
gone for a toss and everyone, well mostly everyone, is in the confines of their home sweet home. It is
easy to see here, that since barring essential services, everything is at a halt; there is a small, practically
negligible demand for oil and to further stabilize prices, Saudi Arabia proposes to further cut production.
We can now connect dots and see that Russia has a reason to oppose this proposal. Voila, that is exactly
what Russia did. It denied to further cut production and in fact has ramped it up. OPEC+ has now been
axed and the OPEC led by Saudi Arabia, and Russia have entered into a price war. Oil prices (calculated
for a barrel) are hitting all-time lows.

To stabilize the industry, the U.S. has intervened and Russia and Saudi Arabia have agreed to cut
production along with oil producers across the world. This change of plans could also be a result of a
realization that it is now no more possible to hold any more oil. A futile price war has led to
over-indulgence and constipation is what followed later.

Zooming into India’s map now, there are 3 things to note while discussing Oil in India:

1.​ ​India imports 83% of its Oil from OPEC.

2.​ ​Oil price decrease below a threshold is not good for a consumer like India.

3.​ ​Fuel in India, does not fall under GST.

India places itself as a net importer/consumer of Crude Oil. With OPEC being the largest supplier, India’s
oil price is heavily dependent on the prices benchmarked by Brent. India however, does hold some power
in influencing oil deals for itself. India is positioned 4​th by consumption of Oil, behind USA, EU and China.
With such high demand India has influence over changing the dynamics of the demand side of Oil. India’s
crude oil production only covers ~17% of its requirements, but ramping it up in staggered timeframes can
be of use in negotiation. This negotiation would be of more importance, if India goes into strained
relationships with its suppliers.

It goes without saying that a decreasing oil price is nothing but good for a consumer country like India.
India’s import bills will decrease and subsequently inflation can be kept under control as industry input
costs decrease. There is however, a fine print that most of us fail to take note of. Beyond a point,
decreasing oil prices no longer offer an advantage. The following is a simplistic flow of events aimed at
explaining why the situation is not-so-favorable for India:

1. ​India receives remittances from major oil producing nations to the tune of 60-70 billion$. These
remittances are from overseas Indians pumping money into Indian economy through money transfers
made for EMIs, purchases and investments.

2. ​Oil prices slashing to hurtful lows would cause a significantly decreased economic activity in oil
producing companies.

3. ​This would result in a heavy reduction of remittances. Remittance is practically money raised by
India, without having to invest its resources.

4.​ ​India would have to purchase additional US Dollar to buy Oil now.

Important point to be noted here is that oil can only be purchased in US Dollar and these remittances are
also received in US Dollar. These remittance payments made in US Dollar can directly go into purchase
of items like Oil which can only be bought with US Dollar. This situation is advantageous for India, as it
does not have to buy US Dollars with a Foreign Exchange premium in this case. However, as can be
extrapolated, the current drop in prices is not going to be easy for us as a consumer either because of the
reason explained.
Currently, due to depressed demand, Oil refineries in India are facing margin pressures. Higher taxes
could be levied on oil imports or production, but lower prices have a direct impact on absolute earnings of
these companies. The only winner here might be the end consumer, who could see some decrease in
price despite offsetting all measures to support oil companies in India. With the slumped demand and
almost every Indian being economically hit, it is the only small ray of positivity in the midst of plight.

Currently, there is not much that we can do about influencing what is happening with oil globally. For now,
it is better to stay distant from this show of power and invest our energy in a bigger crisis that is making us
suffer. However, in future, there are ways to standardize how we operate with fuel.

Fuel, at the time does not fall under the GST regime. State imposed taxes on fuel forms a huge part of
their revenue. For example, Delhi charges a Value added Tax of 27% on petrol. Similarly, Mumbai
charges ~40% VAT on petrol. This clearly indicates how disparate and volatile the prices of fuel are
across the country with each state exercising their own control over the prices. Alongside, the Centre
levies an excise duty by terms of value instead of percentage. For e.g. it is ~20 Rs. Per liter on petrol.
Keeping tax as a value is another way of keeping the revenue flow constant. In this case, any price
fluctuation of petrol would not make the Centre lose money. This would not have been the case if the
taxation here was percentage based.

Including fuel under GST, and even putting it under the highest bracket of 28% GST would amount to a
huge loss for state governments. Additionally, it will lead to control redistribution. A colloquium would now
decide upon pricing and states could not impose their own set of taxes to keep their revenue stream
unhindered. Also, a percentage based tax could further hurt the chances of everyone coming to
consensus on the topic.

However, it has certain advantages as well. To start with, fuel prices across the country will be
standardized. Oil companies have to operate with two sets of compliance based on product types GST
and Excise Duty and VAT. This leads to increased compliance cost and bringing it under GST will help
decrease it. These companies currently can also not apply for Input Tax Credit for having paid GST to
companies providing capital goods. Being able to do that would bring another reduction in compliance
costs and consequently consumer prices. Being a part of GST will amend this break in the value chain of
GST compliance from capital goods, oil production and refinement to consumption. Depending on the
implementation rates, fuel being taxed with GST could also mean lower prices for end consumers.
However, that is subject to tax rates, as a completely new system could be formed under GST to bring
fuel under its ambit, which might or might not affect rates.

Paranoia of state and center governments over loss of revenue cannot be disregarded. Here, the GST
council and the governments would have to come together and meet at a point where revenue generation
is reasonable. Perhaps, a completely new rate structure for fuel and other by-products could be a suitable
way of implementation. However, increasing it beyond a level would possibly not bring any change for the
end consumer. Also, this requires states to practically lose their autonomy and to get anyone to do that is
not easy. Higher say would have to be given to states in decision making.

The world order of oil prices is currently unstable and a possible recovery is not coming in before a few
months and a worldwide recovery from the CoronaVirus. Supply cut measures are being made by
producers, but prices getting back to their normal stage would take time. It is difficult to initiate talks of
bringing fuel under GST at this point of time because there is already a lot at the hands of states.
Possibly, once we are back on the growth trajectory and industries start recovering; this could be the way
forward for how India prices its fuel.

Needless to say, crude oil, however necessary, is not the future. The world has been digging new
resources of oil, for example, production of oil from Shale Gas. But, countries today need to start placing
their bets of renewable energy sources and alternate sources of non-renewable sources. India aims to
reduce its crude oil consumption by 15% in the coming future with the help of alternate sources and local
production. Railways is targeting, meeting 25% of its energy requirements from renewable resources by
2025. A movement towards renewable energy is the only way countries will be able to become
sustainable. Working with policies today to grow economically is undeniably of prime importance, but
keeping an eye for the future never hurts.