Oh boy, the petrol prices have made a century! That is unheard off, but it is true. Not so long ago, in July 2020, the price of petrol was around Rs. 76 per litre. It has galloped quickly to Rs. 100 in few states and about to hit the century in few others. Now what happened between then and now (in span of just 6 months) is the question!
To understand this, it is important to understand India’s oil dependency (Oil imports) and the basics of petrol / diesel prices in India.
India’s oil dependency:
India depends on foreign oil and hence, a large burden on Import Bill.
India had set a target to reduce oil dependency from 78.3% in 2014-15 to 68% in 2022, i.e., a reduction of 10% by 2022.
However, India’s dependency on oil has steadily increased to 85% during the Apr-Dec of 2019-2020.
Crude Oil Price:
The Government of India de-regulated the petrol prices in 2010.
Fuel retailers like Indian Oil, HPCL or BPCL have the freedom to fix the petrol prices based on a formula – trade parity price (TPP).
How to calculate based on TPP? An assumption is used that 80% of the petrol and diesel is imported into India and 20% is exported.
So, petrol and diesel prices in India are determined based on prices of these fuels in the international market.
The TPP in dollars is converted to rupees - so dollar price movement also plays a crucial role and on an average, rupee has depreciated by 3-3.5% year on year basis.
Lastly, other costs and margins of the oil companies, dealer commission and taxes add to the fuel cost.
The crude prices in the last 12 months have seen crazy moves from $61 per barrel in Jan 2020 to $21 per barrel in April 2020. Such a drastic fall of ~ 70% in a span of 2 months was due to covid lockdowns and hardly any demand for crude.
Fin Fact: On 20th April 2020, the crude prices in futures market in US went sub-zero (as low as -$37 per barrel) for the first time in trading history. The decline below zero means that sellers are effectively paying buyers to take the oil off their hands!
Fast forward to Feb 2021, the crude oil prices have been steadily rising as the world economies are opening up and has reached ~ $62 per barrel. To aggravate the situation, the crude prices have increased by ~$10 per barrel in just the last 20 days! Due to this steady increase in crude prices, the fuel retailers have increased the fuel prices in line with increase in crude oil prices as explained earlier.
Look at the below price comparison:
Price of petrol in Mumbai in Oct 2018: ~Rs. 91 per litre v/s global crude oil priced at ~$ 80 a barrel
Price of petrol in Mumbai in Feb 2021: Rs. 96 per litre v/s global crude oil priced at ~$ 60 a barrel
What has lead to this anomaly? The answer to this is taxes levied by the Government. The present Government had increased the excise duty by Rs 3 per litre in March 2020 and by another Rs 10 per litre in May 2020 when global crude oil prices were below production costs. This was done with an expectation that the revenue collections of the Government will be low as India was under severe lockdown and the Government had a disinvestment target of Rs. 2.1 lakh crore in FY21 (of which only ~ 20,000 cr has been divested so far). The Government compensated this shortfall in disinvestment target with an incremental revenue of Rs 1.4 lakh crore from higher taxes on petrol and diesel.
Source: IOCL, News Articles
It can be seen from the above table, the actual cost of fuel price including dealer commission is only 40%, the balance 60% is taxes to the Centre and the States. Hence, there is significant scope to reduce the fuel prices by reducing the central and state taxes.
To summarize:
Government: Saw an opportunity to raise prices and shore up its own revenues to contain the fiscal deficit
Fuel Retailers: They are neutral as they have passed on the price increase to the end consumer
Consumers: They did not get the benefit of lower crude prices as they were in lockdown then and they are paying the high prices at present which is culmination of crude price increase as well as increase in taxes.
The question is, when will the Government bell the cat and reduce taxes? Till then, let us wait and watch!
Very informative
Well explained.