Budget to assume crude oil price of $55-60/bbl for FY18

At those prices, the petroleum subsidy for next year would be a comfortable Rs 26,000-27,000 crore

The Centre is preparing the Union Budget 2017-18 assuming an average crude oil price of $55-60 a barrel for the coming financial year. At those prices, the petroleum subsidy bill for next year would be a comfortable Rs 26,000-27,000 crore, similar to this year, it is assumed.

However, if prices hover above $60 a barrel for most of next year, the subsidy calculations and overall assumptions will be under strain. Business Standard has learnt from senior sources that the government is likely to pass on the burden to consumers if oil prices breach the $65-a-barrel mark. 

According to discussions between officials from the petroleum and finance ministries, once prices cross that level, the government could come up with a burden-sharing mechanism, where higher prices will be equally absorbed by both consumers and the government. This would mean that if prices go above $65 a barrel, the Centre could turn its back on decontrolled regime on petrol and diesel. 

Up to $65 a barrel, the current excise duties and tax structure for decontrolled petrol and diesel would remain the same. Beyond that, the burden would be shared through a reduction in excise duty and increase in retail prices. 

“The Budget is likely to assume a $55-60 barrel oil price. In spite of the Organisation of the Petroleum Exporting Countries' (Opec’s) production cuts, we expect prices to remain below $60 a barrel, barring a major global shock,” said an official aware of the deliberations. 

The Opec has announced it will reduce production by 1.2 million barrels a day to 32.5 million barrels a day from January 2017, which could lead to a higher crude oil price regime. Although prices are unlikely to touch the 2012 peak of $110 a barrel, they’ll inch upwards from the current $50-55 a barrel. 

Budget makers assume an average oil price for the year. For 2015-16, the fuel subsidy projection of Rs 30,000 crore was made assuming crude oil price at $70 a barrel. For 2016-17, it is $50 a barrel. The Centre has been quite comfortable on that front as oil prices have hovered below that level for the most part of the year, going as low as $37 a barrel in early March.

“As far as prices are concerned, for the past one year or so, the prices were in the range of $45-50 a barrel. When we talk of a comfortable range band, anything between $45 and $55 a barrel always seems to be fine with us. As a refiner, we want to make sure that if the market-pricing mechanism continues, the capability of consumers to afford prices should be there. We have that capability at the current pricing range,” said B Ashok, chairman of Indian Oil Corporation, in a recent interview with Business Standard. 

Crude prices are currently at $53 a barrel for West Texas Intermediate and $55 for Brent Crude. Most energy analysts see prices for the calendar year 2017 to be in the $55-60 range as well, with World Bank and Goldman Sachs at the lower end of that range.