Why Should Crude Oil Prices Go Up?

If international crude oil prices zoom past the current level of about $90 per barrel and move towards $100 and beyond, middle-class consumers are not going to keep quiet about their discomfort, points out Arun Balakrishnan, former chairman and managing director, Hindustan Petroleum.

Fuel prices are the rage in all types of media -- the Press, Television and even when folks get together for a cup of tea.

The middle-class Budget is being seriously eroded with OPEC's unity in cutting production to fill their coffers.

But everyone knows that a good part of the price you pay per litre of petrol and diesel is pocketed by the central government in the form of excise duty/cess and by the state government in the form of Value Added Tax (VAT), the larger share going to the state governments thanks to taxes being levied ad valorem by them.

Even the folks at OPEC have figured this out and say we guys make more money per ton of crude oil by levying taxes than they do in extracting it from their mother sands and selling it to us.

Governments love taxing petroleum products as it is the most efficient form of tax collection.

None can evade it nor can anyone pocket the tax collected by cheating the customer.

And there is hardly any collection cost like the hordes of tax inspectors required for taxing other commodities or products.

All the hard work gets done by oil companies who collect it from the customer through its customer servicing network and credits the proceeds to the concerned centre and state tax authorities.

So, taxes, surcharges and levies from petroleum are not going to go away any time soon.

But there can be a catch.

If international crude oil prices zoom past the current level of about $90 per barrel and move towards $100 and beyond, the middle-class retail consumers are not going to like it and obviously they are not going to keep quiet about their discomfort.

And they constitute most of the petrol/diesel consumers.

The high price of diesel fuel, for example, would result in all round price increase in all sectors of the economy and would get reflected in higher wholesale as well as retail price indices.

This would dampen the government's propensity to tax these fuels beyond a point.

But why should crude oil prices go up?

In oil production, barring the Saudis and the Russians, the low hanging fruits are mostly gone.

The cost of exploration and production is not getting any cheaper and the access to technology for deep see exploration is posing problems.

Fracking, which just a few years ago, brought the cost of crude oil to surprising low levels are no more attractive considering the environmental damage and poisoning of the underground water table.

The UK has banned fracking because of adverse public reaction.

In general, fracking is not feasible in countries with high density of population. So, it is not an option for India.

Large investors like the pension funds or the State-owned funds have bought into the concept of ESG (Environment, Social and Governance).

The visual impact of floods, droughts, and rapid melting snow because of global warming (leading to climate change) are dictating investment criteria.

Reports say that the large funds are reducing investments in oil exploration and production companies and there has been a reduction of over 40% in investments since 2015 in this sector.

This would obviously reduce further discovery of new oil fields and gradually reduce the free float capacity in oil production resulting in pressure on oil prices.

Price changes will be fast forwarded if there is a war, or even a threat of war in Eastern Europe or the Middle East.

There is indeed a growing disenchantment with the carbon atom and fossil fuels.

Though Natural Gas (NG) is considered a less harmful source of energy, many see it only as a transition fuel.

In any case, the pricing of NG is based on crude oil and refined product prices.

The supply-demand mismatch for NG would naturally make it pricier than what it is now.

Especially since countries like Germany and Japan have eschewed the use of nuclear energy, which according to some is the most economical and reliable source of energy available today.

About 60% of petroleum products is used for mobility.

Alternates such as electric propelled mobility is slowly rearing its head.

Higher capacity batteries with faster recharge capabilities and using more available metals for its construction are lowering the cost and increasing range thereby reducing driver anxiety.

The acceptance of electric vehicles is increasing with better technologies being available, especially for intra-city use.

Appropriate government policy for fast chargers in non-urban areas and highways besides standardisation of batteries for quick replacement can make a difference.

There are already concerns on mining of metals like lithium, the key element in quick charging batteries, and its disposal after use.

So is the case with solar panels and the chemicals used in its fabrication.

These concerns are leading into more research on green hydrogen and fuel cells.

Once the cost and ease of decentralised hydrogen production becomes viable, this can become a better option than internal combustion engines which have ruled mobility for nearly a hundred and fifty years.

More so because, the exhaust from hydrogen powered vehicles is only steam.

But more than anything else, it would be climate change and its visible impact that would influence behaviour and bring about serious intervention to replace the fossil fuel twins of oil and coal.

As the old saying goes, the stone age did not end because of the shortage of stones.

Similarly, oil will still be around for quite some time, but it won't command the premium which it does now.

The applications may be more as feedstock for petrochemicals than as fuel for mobility.

Nobody likes to be washed away in a flash flood as we have seen in Kerala and many parts of the world.

Or become extinct because of lack of rain and rivers drying up, leading to raging (forest) fires that have been enveloping large, populated living areas.

Governments will then have no choice but to bring in legislation that would reduce if not eliminate the use of fossil fuels.

That day and age may not be too far away.

Feature Presentation: Aslam Hunani/Rediff.com