Securing Domestic Fuel Supply

India has adjusted its fuel export duties in a move to prioritize domestic supply amid rising geopolitical tensions in West Asia. This policy shift signals a strong focus on national energy security as global crude oil prices surge.

New Export Duty Adjustments

Effective May 16, the government imposed a Rs 3 per litre tax on petrol exports. Simultaneously, duties on diesel exports were reduced to Rs 16.5 per litre from Rs 23, and on aviation turbine fuel (ATF) to Rs 16 per litre from Rs 33. These changes follow a series of recent adjustments, including hikes and reductions in April and early May, reflecting the dynamic nature of global energy markets. The goal is to discourage exports and ensure sufficient fuel is available domestically, especially as crude oil prices have surged past $100 per barrel. WTI futures reached $105.57 recently, while Brent crude averaged $117 in April.

Global Risks and India's Reliance

Concerns over supply disruptions, such as the closure of the Strait of Hormuz, are contributing to price volatility. India, which imports over 85% of its crude oil, is very vulnerable to these global market shocks. Making domestic supply management crucial, especially as the country's energy demand is projected to double by 2045.

Policy Shifts and Market Impact

This move marks a change from previous policies where petrol exports faced no tax. The frequent adjustments to export duties, which began in March, indicate a policy approach that reacts to immediate market conditions rather than long-term strategy. The government has used windfall taxes before, notably in 2022, as a tool to manage high profits during periods of high global prices. Such policy changes can create uncertainty for the energy sector, impacting companies like ONGC and raising questions about consistent growth execution.

Impact on Refiner Margins

Refineries had recently experienced high margins due to soaring oil prices, while state-run oil marketing companies (OMCs) faced significant losses on domestic sales because retail prices remained fixed. Measures taken in April already capped refinery margins at $15 per barrel to balance these profits and losses. The latest duty changes, while aimed at domestic availability, may affect the profitability of refineries focused on exports.

Concerns Over Policy Uncertainty

The government's frequent and rapid changes to export duties raise concerns about policy stability and could potentially discourage long-term investment in export-oriented refining. India's heavy reliance on imported crude leaves it exposed to global supply shocks. While domestic policy adjustments can help, they only partially mitigate these risks. The need to balance revenue, domestic affordability, and energy security often results in reactive policies. These repeated adjustments, including windfall taxes, could also reduce incentives for domestic exploration and production by capturing profits.

Navigating Energy Demand and Volatility

India's energy demand is expected to grow significantly, requiring a stable and predictable policy environment. While efforts are underway to boost domestic production and clean energy, the immediate challenge is managing volatile global crude markets. The success of these duty adjustments will depend on their ability to ensure sustained domestic fuel supply and price stability without hindering industry investment or creating excessive financial strain.