Context: As the global recovery gains strength, the price of crude oil is nearing its highest level since 2018, while the price of natural gas and coal are hitting record highs amid an intensifying energy shortage.

• The price of Brent Crude has breached the $85 per barrel reaching its highest level since 2018 on the back of a sharp increase in global demand as the world economy recovers from the pandemic. Key oil producing countries have kept crude oil supplies on a gradually increasing production schedule despite a sharp increase in global crude oil prices. The price of Brent crude has nearly doubled compared to the price of $42.5 per barrel a year ago.
• High crude oil prices have contributed to the prices of petrol and diesel regularly setting new record highs across the country in 2021.
• In this edition of Big Picture we analyse the rise in global fuel prices and impact on India. 

Key Points
Oil Pricing

• Generally, the Organization of the Petroleum Exporting Countries (OPEC) used to work as a cartel and fix prices in a favourable band.
• OPEC is led by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand).
• OPEC has a total of 13 Member Countries viz. Iran, Iraq, Kuwait, United Arab Emirates (UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, and Venezuela.
• OPEC could bring down prices by increasing oil production and raise prices by cutting production.
• The global oil pricing mainly depends upon the partnership between the global oil exporters instead of a well-functioning competition.
• Cutting oil production or completely shutting down an oil well is a difficult decision, because restarting it is immensely costly and complicated.
• Moreover, if a country cuts production, it risks losing market share if other countries do not follow the suit.
• Recently, OPEC has been working with Russia, as OPEC+ to fix the global prices and supply.
• In 2016, OPEC allied with other top non-OPEC oil-exporting nations to form an even more powerful entity named OPEC+ or OPEC Plus.

Reasons for High Prices
Slow Production

• Key oil producing countries have kept crude oil supplies on a gradually increasing production schedule despite a sharp increase in global crude oil prices.
• OPEC+ had agreed to sharp cuts in supply in 2020 in response to Covid-19 global travel restrictions in 2020 but the organisation has been slow to boost production as demand has recovered.

Supply Side Issues

• Supply side issues in the US including disruptions caused by hurricane Ida and lower than expected natural gas supplies from Russia amid increasing demand in Europe have raised the prospect of natural gas shortages in the winter.

Impact on India
Current Account Deficit

• The increase in oil prices will increase the country’s import bill, and further disturb its current account deficit (excess of imports of goods and services over exports).
• Inflation:
• The increase in crude prices could also further increase inflationary pressures that have been building up over the past few months.

Fiscal Health

• If oil prices continue to increase, the government shall be forced to cut taxes on petroleum and diesel which may cause loss of revenue and deteriorate its fiscal balance.
• The growth slowdown in the last two years has already resulted in a precarious fiscal situation because of tax revenue shortfalls.
• The revenue lost will erode the government’s ability to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the Goods and Services Tax (GST) framework.

Economic Recovery

• Although the rising prices have impacted the world, India is particularly at a disadvantage as any increase in global prices can affect its import bill, stoke inflation and increase its trade deficit, which in turn will slow its economic recovery.
• India and other oil importing nations have called on OPEC+ to boost oil supply faster, arguing that elevated crude oil prices could undermine the recovery of the global economy.

Natural Gas Price

• The increase in gas prices has put upward pressure on the price of both Compressed Natural Gas (CNG) used as a transport fuel and Piped Natural Gas (PNG) used as a cooking fuel.