“Brent Crude Oil crossed the $75 mark, Impact on Inflation”

Brent Crude Oil impacts in Global and Indian food price index.

Brent crude oil crossed the psychological mark of $75. Currently, on 2nd July 2021, it is trading around 75.76 dollars. This is the highest level since 2019.

Brent Crude Oil chart
Brent Price Chart | courtesy Business Insider

According to some analysts, Brent crude oil can even touch the $100 mark soon. Currently, we are seeing the impact of increasing Brent crude oil price in *pulses & edible oil mostly. And of course, in petrol and diesel.

*Pulses are yearly harvests that yield somewhere in the range of one and 12 grains or seeds. The expression “Pulses” is restricted to crops collected exclusively as dry grains, which separates them from other vegetable yields that are reaped while still green. For example, dry Peas, Lupines, Dry Beans, etc.

What is the main aspect of the increasing price of Brent crude oil?

The improving prospects of the Global economy. As the Corona Virus cases are decreasing globally, the economy is also unfolding. The expanding demand is the main factor behind the rising price. Though, some market members stayed distrustful of the demand projection.

Let’s Compare Indian Consumer Food prices with Global food prices for better understanding.

When we see the Global food price that has increased exponentially compare to Indian. Let’s look into the graphs, for global food prices we will see The UN Food & Agriculture Organization’s (FAO)-World Food Price Index (FPI). FPI has touched 127.1 points in May 2021, it is the highest level since 2011.

If we compare a few international commodities, Soya bean’s price has touched 1642 cents/bushel on May 12, where a year ago the price was at 869 cents/bushel, currently, the price is at 1369 cents.

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Similarly, the recent peak price of coffee was 162.35 cents per pound on May 31. A year ago the price was 95 cents per pound. And the current price is 157 cents per pound.

For Indian food prices, we will see the data of the Consumer Food Price Index (CFPI), Indian inflation rate for CFPI rose around 5% only, compared to global FPI or FAO-FPI which rose to 39%.

Brent crude oil impacts in Global & Indian food price Index
The Redline represents the FAO-FPI & the Blue line represents the CFPI

Another important factor we can notice from the chart that, last year when the pandemic hits all over the globe, FAO-FPI was fallen almost below ‘0’ or we can say it touched the negative mark. Where if we see the CFPI it didn’t reduce the rate. Even at that time, it was almost double-digit.

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Why is there a huge difference?

As we have mentioned before, the demand has increased after the covid pandemic, which led to the price hike.

Chinese Stockpiling-

China has somehow thought that there is going to be another Covid outbreak, to protect the nation’s food issue, China was reserving a huge amount of commodities.

Impacts of Weather

The United States, Brazil, Argentina faced production shortfalls due to the dry weather

Where in India, fortunately, had good monsoon in last 2 years. Not only India, Australia, and Canada also didn’t face any weather-related issues.

And if we see in India the CFPI has started falling from December. This is due to the bumper post-monsoon Kharif corp. Corps was being harvested and arriving in the market.

Two main reasons for lower Food Price Index in India- (Except Pulses & Edible Oil)

 One of the main reasons of course as we discussed above is Monsoon. We didn’t face supply-side shortages.

Another main reason was & is the decreasing demand. Due to the outbreaks of Covid-19 India had several Lockdowns. All the Hotel, Restaurants was shut during the lockdowns. As compared to before India didn’t have that many Wedding Reception in last year.

For households were also the demand was decreasing due to the increasing level of unemployment.

In short, the demand was decreasing in comparison to supply. And that led the inflation rate to decrease.

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Now, the question is how the increasing price of Brent crude oil will affect Indian food?

It depends on several factors as we mentioned why India didn’t have a higher rate of inflation, the same will depend in the future-

International Prices. As we are seeing in Pulses & Edible Oil. Though we are seeing a dip in other commodities even though the price of Brent crude oil and Global commodities are increasing.

But During 2007-2013 we have seen a similar impact in India. In the initial time when the International price of commodities was increasing, Indian domestic commodities price was decreasing but soon after that, we have seen a sudden spike in the price. Does history will repeat?

Monsoon. Now we know it has a major impact on agriculture production. As India benefited before, hopefully in the future it will be the same. The Southwest monsoon season has jumped 18% above average precipitation so far. A third consecutive good monsoon can be a strong alibi for the supply side.

Brent Crude Oil Price. With the increasing price of Brent, we are seeing the hikes in Petrol Diesel. Although still, we didn’t see much effect in consumer food items. For example, although Diesel price has increased 15-16 Rs per litre in the last year, most dairies haven’t increased their rates for pouch milk.

One of the main reasons for that can be the reducing demands of consumers. Instead, dairies may have reduced the wages of farmers. Because at the time of low demand, the firms start increasing the fare that may harm the long term. Although Amul has hiked milk prices By 2 Rs per litre from July.

Brent Crude Oil simplification

On & Average- 1 barrel can carry near around 42 gallons or 159 litres of crude.

1 barrel Brent Crude=20 Gallons of Petrol (76 litres), 12 gallons of Diesel (46 litres) & Four gallons of Jet fuel (15 litres).

Currently, 1 barrel of Brent costs around Dollar 76 or 5679 INR.

If 1 barrel of crude can produce 76 liters of petrol, and the current price of petrol is 99.15 (In Delhi on 2nd July 2021) then,

7535 Indian rupees of Petrol can be produced from ‘1’ barrel of Crude. 

Indian Tax Structure of Petroleum-

Petrol and Diesel do not come under the GST. There are 4 parts before the retail price gets to decide. Excise Duty, Vat, Dealers commission, Dealer price charge. Other than that freight charge added to the retail price.

Last month the tax rate was for Excise Duty 33 Rs & Vat 21 Rs. But, it is to note that, tax prices get change from time to time.

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