This in a way is a bigger oil shock than the one in 1973 when the oil producing nations first got together to raise the price of oil four-fold at one go, sending the global economy in a tizzy. The ensuing panic took weeks to be factored in by the economic players, pressuring the bottom-line of most corporate and ordinary consumers alike. We remember how the then Jana Sangh leader in the Lok Sabha, Atal Bihari Vajpayee, rode a bullock cart to go to Parliament with the photograph making front pages across the nation.
Since then, the world has most reluctantly come to terms with high cost of oil and other fuels. But the shock earlier this week was highly unusual. How the price of a barrel of crude oil could be $ 40 in the negative needs to be understood, meaning on buying a barrel instead of paying money you will earn $40 flat. This needs a little explaining. The May oil futures on the US Mercantile Exchange were up for delivery on Monday. But due to the huge paucity of storage capacity, future traders were in no position to take actual delivery of the oil.
Therefore, in order to free themselves of the commitment to purchase, they were willing to pay the buyer over $40 a barrel. Not unlike in Japan and a couple of other countries where banks levy a charge instead of paying you on your deposits. In both cases, the situation reflects a problem of plenty. If there is now a huge glut of crude oil in the global market, in Japan banks and the government are sitting on a huge mountain of cash reserves. Desperate to boost demand, they encourage people to spend more and more money. In other words, excess liquidity in the Japanese case and excess oil in the other. But money can still be stored, oil cannot be.
Given that the price of oil had already slipped to historic lows due to a creeping recession, the grudge match between two autocrats, that is, Putin of Russia and Mohammad Salman of Saudi Arabia, had further worsened the situation. Both countries extracted far more crude oil than the slowing global economy was in a position to absorb. Now the glut of West Texas Intermediate crude in the US had become a headache. Unlike other commodities, the capacity to store oil world-wide is limited. Which brings us to India. Being the third largest importer of oil globally, it would ideally store up as much as it can to exploit the current glut in the global market. But for want of a storage capacity this is not possible. Though India is increasing its strategic storage capacity, it cannot be done overnight. Ditto for the domestic refineries.
A belated agreement between OPEC and Russia envisaged a cut of nearly a million barrels daily in production by Russia and Saudi Arabia from May 1, but the negative price of oil on the US futures market and the on-going lockdown imposed by the coronavirus pandemic would make even the take-off the reduced oil production difficult. Demand for oil has plunged sharply due to the global lockdown. This may not be an unmixed blessing for India since the adverse impact on the Middle East economies would reduce the flow of remittances from the Gulf.
Besides, given that it would take a while for the economy to run full-steam, there will be a contraction in domestic demand for oil. The fact that the Centre instead of passing the gains from the sharp fall in global oil prices prefers to itself retain the gains through higher levies, Indian consumers must be resigned to paying a relatively high price for petrol and diesel regardless of the bloodbath at the oil market exchanges worldwide.
At least in the current situation when the economy has been severely hit by the lockdown, and the Centre and the States are saddled with the additional burden of handing the corona-inspired human crisis, no one should resent paying a high price for petrol and diesel so far as the higher accruals from central and state levies help partially tide over the bourgeoning financial crisis.