Why are Petrol & Diesel prices not coming down?
If you are a vehicle owner, chances are that each time you visited a petrol pump in the past few months you must have wished for petrol and diesel prices to come down. We all know that fuel prices have remained the same for the last few months despite getting constant updates on falling crude oil prices. Have you ever wondered why Indian fuel prices are not reflecting the same?
Before we address this, let us give you a little background.
When the Russia-Ukraine war broke out in early 2022, crude oil prices had shot up to in excess of $120. However, oil prices have now tumbled to their lowest level to $84 per barrel for the first time in months. Moreover, Indian refiners have been securing discounted oil from Russia post the war sanctions. In fact, Russian oil now accounts for 16% of India’s overall imports compared to just 0.5% a year ago.
Chart 1: Crude Oil Brent (USD/Bbl)
However, fuel prices in India have largely remained unchanged. For instance, in the national capital, petrol and diesel prices have been Rs 96.72 and Rs 89.62 a litre respectively for the last 4 months. In Mumbai too, petrol and diesel prices have remained unchanged at Rs. 106.29 and Rs. 94.23 a litre for the past 3 months
We all know that the prices of petrol and diesel are directly dependent on global oil prices. But there are a host of other costs added to the oil price to come to the final price we pay at the pump station. Let’s understand that in detail.
Cost of crude oil: The cost of crude or unrefined oil varies based on demand and supply economics, international political relations and future reserves. In the international market, a barrel of crude oil is priced and traded in USD. Changes in the price of crude oil and currency movements directly impact petrol and diesel prices in the country.
Processing Costs: The crude oil is acquired, refined and distributed by Oil Marketing Companies (OMCs). Indian Oil, Bharat Petroleum, Hindustan Petroleum are examples of such companies. Costs incurred here include freight, processing costs, margins, operational costs – all of which affects the final price at which fuel is sold.
Commission for dealers: This is the amount paid by OMCs to the dealers who are in charge of distributing the fuel to the final customer.
Taxes: The central government levies excise duty on petrol and diesel – a predefined amount irrespective of fuel prices. In addition, state governments impose a Value Added Tax which is applied at all stages of the production of goods and services. For example, in Delhi excise duty is 21% and VAT is 16.25% of the cost per litre of petrol.
Now coming back, why have petrol and diesel prices not come down?
Reason 1: Weakening of the Rupee
Repeated interest rate hikes by the US Fed and increase in India’s trade deficit has triggered the depreciation of rupee against the dollar to a historic low of 81.09. This will make import of crude oil expensive. How? Crude oil prices are always quoted and traded in USD. This means that India has to spend more to get the same quantity of oil. Moreover, India is an import-dependent nation as it gets around 85% of its oil from other countries. Thus, the weakening of the rupee has a bearing on the domestic price of fuel.
Reason 2: Time to Recoup Losses
When international oil prices surged to multi-year highs, OMCs didn’t revise their selling price in line with the international costs to help the government tame the already high inflation. As a result, these companies were incurring huge losses, almost Rs.20-25 per litre on diesel and Rs. 14-18 a litre on petrol – posting a combined net loss of Rs. 18,480 crore in the last quarter. With low crude oil prices, this is the right time for OMCs to recover its past losses before the benefit can be passed on to the consumers.
Given the repeated rate hikes to tackle inflation, rupee depreciation may persist, making oil imports expensive. With OMCs trying to recoup losses, fuel prices in the short term are unlikely to drop. Unless, there is pressure from the government to bring the prices down, it seems that our fuel bills will continue to dent our savings for some more time.