Demand destruction a possibility if oil price rise passed on to consumers, says Moody's Vikas Halan

Representative image (Source: Reuters)

As the Russia-Ukraine crisis has sent global commodity prices zooming along with supply constraints, elevated oil prices are starting to worry consumers across the globe.

Analysts are betting on whether the high crude oil prices this year and possibly even next year will eventually lead to demand destruction.

''We have seen price control in some countries, which has been artificially kept the demand up. But, if the high oil price is passed on to the customers, then demand destruction is a possibility," said Vikas Halan, Associate Managing Director of Moody's Investors Service in an exclusive interview with CNBC-TV18.

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However, he adds that there are two scenarios. "On one hand, high oil prices could negatively affect the demand, but COVID-19 pandemic restrictions are easing up in many countries.'' The easing of restrictions could boost the demand, so we have two forces acting against each other, according to Halan.

The comments by the expert come a day after a report by the rating agency said that sanctions on Russia and high oil prices in the wake of the Ukraine war will have mixed credit implications for India's oil and gas sector.

State-owned refining and marketing companies Indian Oil Corp, Bharat Petroleum, and Hindustan Petroleum Corp might not be able to fully pass on the recent spike in crude oil prices to the consumer and as a result, profitability will weaken, according to Moody's.

India's top fuel retailers have together lost around Rs 19,000 crore in revenue in March by keeping petrol and diesel prices unchanged despite a sharp rise in crude oil prices, Moody's said.

Also Read: Sanctions on Russia may result in impairment losses for ONGC, others: Moody's

For countries such as India, which imports around 85 percent of its crude oil requirements, the situation will necessitate further investments to develop alternate energy sources to meet its energy requirements, intensifying carbon transition risks, according to the rating agency.

India, the world's third-biggest consumer and importer of oil has also not banned Russian oil imports, unlike several Western countries.