Basic HTML Version
MOTORINDIA
l
March 2012
89
Hike of 10-15% in regulated fuel
prices inevitable: CRISIL
CRISIL Research expects an upward pressure on
crude oil prices due to the ongoing geo-political ten-
sions in Iran. As a result, average crude oil prices will
remain firm in the range of $110-120 per barrel during
2012, higher than the earlier estimates of $100 per bar-
rel, despite a weak global economy. This will compel
the Government to hike the retail selling prices of regu-
lated fuels at least by 10-15 per cent in 2012-13 in order
to rein in the mounting under-recoveries.
In a bid to counter Iran’s plans to acquire nuclear
weapon building capabilities, the
European Union (EU) has decided
to place an embargo on the import
of Iranian oil. In retaliation, Iran,
which accounts for about four
per cent of global crude oil pro-
duction, has threatened to cut oil
exports to the European countries
and also close down the Strait
of Hormuz. This gateway
handles 35-40 per cent of
the global oil trade, in-
cluding supplies from Iran,
Saudi Arabia and Kuwait.
“A supply disruption due to closure
of the Strait could result in a sharp spike in oil
prices. During the earlier incidences of conflicts
in the Middle-East such as the Iran-Iraq war, the Iraq-
Kuwait war of 1990-91 and the Iraq war of 2003, every
one per cent disruption in supplies led to a 9-15 per cent
increase in oil prices”, says Mr. Sridhar Chandrasekhar,
Head - CRISIL Research.
However, the likelihood of the closure of the Strait
leading to a sharp spike in oil prices appears low. “The
world economy can ill-afford very high oil prices as it
continues to remain fragile due to the uncertainty in the
Euro region despite a mild recovery in the US”, adds
Dharmakirti Joshi, Chief Economist, CRISIL.
Moreover, the closure of the Strait would also have
adverse implications for Iran’s own economy, as oil
exports account for one-fifth of the country’s gross do-
mestic product and two-thirds of
the Government’s revenues.
The tensions in the Middle-
East have already caused oil
prices to go up by 10-15 per
cent in the last three-four weeks.
While the geopolitical risks in
the Middle-East will continue to
exert upward pressure on oil prices,
weak global demand will cap the up-
side. Consequently, barring a conflict
in the Middle-East, CRISIL Research
expects average oil prices in 2012 to be
in the range of $110-120 per barrel,
higher than the earlier estimates
of $100 per barrel.
The upward pressure on crude
oil prices will compel the Govern-
ment to increase the retail selling prices of regulated fu-
els. The Government had increased the retail prices by
10-15 per cent in June 2011. A similar increase in prices
is expected in 2012-13 as well. Despite this increase, the
under-recoveries will cross Rs. 1 trillion in 2012-13 for
the second consecutive year, following the Rs. 1.4 tril-
lion estimated for 2011-12.
According to CRISIL Research, the Government will
share at least 50 per cent of the under-recoveries, which
will exert further pressure on its finances.
w
lubes & Fuels
“A supply disruption due to closure of the Strait
of Hormuz could result in a sharp spike in oil
prices.”
– Mr. Sridhar Chandrasekhar