If US attacks Syria, crude oil may surge to $150/barrel - Expert

If US attacks Syria, crude oil may surge to $150/barrel but, going by experience, Indian users know the price will return to more realistic levels and are also reconciled to fuel price hikes.

August 31, 2013:  

The last time India experienced a oil shock was in August 2008 when crude prices galloped to $148/barrel. It was a difficult period when public sector oil marketing companies were near collapse as fuel losses soared.

Today, as tension levels rise in West Asia, with the US threatening to strike Syria, crude oil prices have once again reacted and are inching towards $120 a barrel. There is fear that a crisis could affect supplies from West Asia, and importers such as India (which coughs up over $170 billion annually for its crude oil) will face the brunt. 

It is still a million-dollar question if the US will go ahead with its plans to attack Syria, but the uncertainty is enough to prompt a surge in crude oil prices. “And, should the strikes actually happen, we will not be surprised if crude touches $150 a barrel ,” says a top-level PSU oil sector official.

Will it, therefore, be back to the grim days of 2008, when IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation were incurring annual losses of over Rs 250,000 crore? In fact, these companies were actually borrowing heavily to stay afloat since the government compensation was slow in coming.

At one point, reports began doing the rounds that if the crisis continued, fuel supplies would be severely affected as a result of refinery shutdowns. “It was an impossibly difficult period when all of us were stressed out and wondering how long we could keep going,” recalls the official.

The Government compensation finally came with added support from the upstream oil companies (ONGC and Oil India) but the damage had been done. The three refiners were battered and this was reflected in their results in 2008-09. The silver lining was that crude had come back to the $40-a-barrel level during the last quarter of the fiscal; the alarm bells fell silent.

Prepared now

The oil industry is, however, a lot more composed this time around even as crude prices stay uncomfortably high. Part of the reason could be because everyone is reconciled to the fact that crude oil will not go below $100 a barrel. “This is the new reality and we are not naïve to think that prices will nosedive to $60 a barrel,” says a finance executive.

By the same yardstick, the think-tanks in these companies are only too aware that any sharp escalation in crude prices (as a result of the crisis in Syria) will only be temporary. It is only a matter of time before they are back to the more realistic levels of $100-105 a barrel.

Deregulation of fuels

The companies are also assured by the fact that the Government has kicked off the process of deregulating petrol and diesel. There have been blips along the way when petrol prices were not allowed to be raised during state elections but the constant dithering of yesteryear is clearly a thing of the past. Today, even the end-user is unhappily aware that a steep diesel price hike is round the corner despite the inevitable political opposition that will follow. The managements of IOC, BPCL and HPCL have also become more pragmatic to the realities of a new pricing regime. Panic and uncertainty were natural reactions in 2008 because nobody had quite seen anything as dire. “You only get tougher and more cynical with experience,” quips an oil industry veteran.

Does this mean there is little to worry about this time around? On the contrary, it is going to be a tough period, especially when the rupee has been ravaged and the economy is in dire straits. At the end of the day, it is going to be yet another rollercoaster year for India’s oil sector. Nobody is, perhaps, too vocal about it any longer because they have seen this scenario remain unchanged for the last six years now

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