Crude oil prices are at a 5-year low. Why hasn’t the cut been passed on to the consumers?

Let’s say you got a big loan and recently got a huge bonus at your workplace. Would you want to spend all the bonus immediately or use part of the bonus to pay some of the loan? Would you not consider it prudent to pay a part of the loan in good times so that you will have the flexibility to take more loans during your bad times? This is what the government is doing now and is a sound fiscal policy. The government had a huge addition to its debt caused by past fuel subsidies. Now that the oil prices are low, it is time to pay a part of that debt.

This is useful for multiple reasons:

  1. The increase in excise tax provides a stability valve and a cushion. When the oil prices increase again, the government can first cut the excise duty before increasing the price at the pump. This is what the government did in the previous times of increase.
  2. If the oil prices increase too fast which cannot be controlled by a cut in excise & cannot be quickly passed to the pump, the government can bring back some of the subsidies and to have that flexibility, it has to keep its current deficit lower.
  3. The government doesn’t want the consumers to get wasteful in using oil. People tend to abuse things when it is cheap. At the end of the day, cheap oil causes excess pollution. In the 80s and 90s when oil prices were going down, Americans went on a car binge producing bigger and bigger monster vehicles that screwed up the environment even more. In contrast, Norway, Sweden, and Denmark have the most expensive gas which leads to the most energy-efficient societies.
  4. ​SUVs are on the rise in India & will get worse as oil prices go down.

And it is not just India that is increasing fuel taxes. Many other smart countries are doing the same too. Australia did the same a couple of weeks ago: Petrol prices went up as the government increased fuel excise despite the rise being blocked by Parliament. US is mulling the same now: America’s national security case for raising the gasoline tax right now

In general, the government has key stabilizers executed through the fiscal policy and the monetary policy. Fiscal policy deals with changing taxes to keep prices & subsidies under control. Monetary policy deals with changing the interest rates to keep the economy under control.

By ukpia