Crude shock: Rise in oil prices may deepen India's auto crisis, say experts

Spike in international crude oil prices, following a drone attack in Saudi Arabia’s largest oil production facility, has come as another blow to India’s beleaguered automotive sector. 

The attack and the resulting cut in Saudi crude oil production led to a 20 per cent spike in Brent crude oil — the benchmark used to price Indian’s oil imports.  Brent is currently trading with gains of 10.7 per cent.

This will translate into a matching or even higher increase in petrol and diesel prices in the domestic market based on the relative movement in the rupee exchange rate against the US dollar.

Higher crude oil prices typically result in currency depreciation in rupee, translating into even higher fuel prices in rupee terms.  The rupee was down 0.7 per cent against the dollar in trade on Monday.

At nearly Rs 80 to a litre, petrol prices in India are among the highest. After the latest spike in crude oil prices, petrol prices could potentially go up to around Rs 90 a litre making a dent in the consumer’s wallet.

This, the analysts fear, will push the cost of vehicle ownership in the country, further reducing the demand potential for the industry. 

According to a 2018 study by E&Y, fuel cost accounts for 20-50 per cent of the cost of vehicle ownership in India, depending on distance travelled per day.  The study assumes fuel cost of Rs 6 per kilometer, which has since increased.

Passenger car and two-wheeler sales are on a downward trajectory for nearly a year now. Wholesale deliveries of passenger cars were down 31.6 per cent year on year in August 2019 to nearly a two-decade low of 196,000 units. In comparison, two-wheeler sales were down 22 per cent last month.

The industry partially attributes this to higher cost of vehicle ownership in the country compared to other countries with a similar level of income. Earlier this week, the country’s largest carmaker Maruti Suzuki blamed increase in ownership cost as the biggest reason for the slowdown in car sales. 

“I think the primary reason for the recent decline in vehicle deliveries is the increase in ownership cost of a car,” said Shashank Srivastava, executive director, marketing and sales, Maruti.

“Though one hasn't seen a very sharp trend but typically, two-wheeler buyers tend to show a preference for motorcycles over scooters when oil prices rise as the former is more fuel efficient. Within motorcycles, buyers prefer mileage bikes,” said Rakesh Sharma, executive director at Bajaj Auto. Sharma doesn’t see the overall demand getting hit with an increase in the fuel prices unless the quantum of rise is very big.

Experts say while total cost of ownership includes other variables such as interest rate on vehicle loan, insurance, parking, registration, and cost of repairs, consumers react differently to changes in fuel prices. 

“For car owners, costs on fuel and parking are variable and something that can be avoided. In comparison, others are sunk cost and fixed as long as one owns the vehicle,” says an analyst on condition of anonymity.

Some vehicle makers, however, see higher crude oil prices as a blessing in disguise due to the positive impact on oil exporting countries in Africa, South East Asia, and West Asia.

Many of these nations are key markets for Bajaj Auto, TVS Motors, and Tata Motor’s Jaguar & Land Rover unit.  For these firms, lower volume in India due to higher fuel prices could be partially compensated by greater demand in oil exporting countries. 

Bharat Giani, analyst at Sharekhan, said an increase in oil prices will hit transporters and truck makers as amid a weak demand, transporters may not see a commensurate hike in freight rates.

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