India pushes for reduced use of gasoline, diesel as pressure mounts on refiners

India should reduce consumption of gasoline and diesel through measures including remote work and virtual meetings, as surging oil prices are putting huge pressure on foreign exchange outflows, Prime Minister Narendra Modi said May 10.

"We devised a lot of these methods during COVID-19. And in the national interest, remote working systems, online meetings, and virtual conferences should once again be widely adopted," Modi said in a public address in southern India.

Petroleum Minister Hardeep Singh Puri reiterated the appeal by Modi, saying measures, such as the ones suggested by the prime minister, would help the nation conserve energy, reduce the energy import bill, and overcome the challenges arising out of military conflicts involving many energy-producing nations.

"India is among the very few countries which have not raised energy prices and has maintained steady supplies to the citizens, even as we see crises unfold in many parts of the world. Our energy sector is absorbing the brunt of the impact," Puri said in a social media post on LinkedIn.

Puri added that oil marketing companies were importing crude, gas and LPG at higher costs, but in order to protect consumers, they were selling final products at relatively lower prices in the retail market, leading to mounting losses.

"However, oil marketing companies have ensured uninterrupted energy imports and supply," Puri said, adding that under-recoveries during the current April-June quarter itself were expected to be about Indian Rupees 2,000 billion ($21.12 billion).

Economic stress

The Middle East war has led to energy price spikes and supply constraints, which are feeding into broader economic stress. Higher crude oil prices and tighter gas supplies will weigh on growth, especially in manufacturing, construction and services such as travel, transport and restaurants. Some manufacturers are shifting to alternative fuels, but cost pressures persist, Dharmakirti Joshi, chief economist at CRISIL, part of S&P Global, and Dipti Deshpande, principal economist, said in a recent research note.

"A prolonged conflict could strain public finances due to higher subsidies and limit monetary policy space as inflation risks rise," they added.

Oil futures settled higher on May 8 as conflict continued between Iran and the US near the Strait of Hormuz. NYMEX June WTI settled up 61 cents/barrel at $95.42/b, down 10% from May 4, while the July ICE Brent futures contract settled $1.23/b higher at $101.29/b, down 11% over the week.

"These are trying times for Indian refiners. Crude has surged nearly 40% since the conflict escalated in February, moving from around $70, hitting a high of $120/b and hovering around $100/b in the past month. Yet, Indian pump prices haven't budged," said Rajat Kapoor, managing director for oil and gas at Synergy Consulting.

The macro spillovers were equally uncomfortable -- India's crude import bill has been running at extremely high levels, while the rupee had depreciated against the dollar, he added.

"Due credit to the refiners -- they have managed the supply side credibly while running refineries above 100% capacity and diversifying crude sourcing to nearly 40 countries. But none of that changes the core arithmetic – refiners are losing in a big way. A retail price rise is coming -- the question is not if, but when and by how much," Kapoor added.