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A sharp spike in the crude oil prices will also reverse the declining trend on inflation and put pressure on central and state governments to cut taxes on petrol and diesel. Photo: Ramesh Pathania/Mint
A sharp spike in the crude oil prices will also reverse the declining trend on inflation and put pressure on central and state governments to cut taxes on petrol and diesel. Photo: Ramesh Pathania/Mint

The reason behind the sharp spike in diesel, petrol prices

A supply cut by Opec and Russia led to a rally in crude oil prices. The Indian basket of crude cost $63.80 (average price) in March 2018 from $47.56 a barrel in 2016-17

Diesel prices on Monday reached Rs64.69 per litre in Delhi, a record high for the fuel. Petrol prices rose to Rs73.83 per litre, the highest since they were raised to Rs76.06 per litre on 14 September 2013.

What is the reason behind the price increase?

Retail prices of petrol and diesel in India track global prices of these auto fuels, not crude, although they are broadly linked to crude oil price trends, which have firmed up. As the supply cut by the Organization of the Petroleum Exporting Countries (Opec) and Russia led to a rally in global oil prices, the cost of the Indian basket of crude, which averaged $47.56 a barrel in 2016-2017, rose to touch $63.80 (average price) in March 2018, according to data from the Petroleum Planning and Analysis Cell, an arm of the oil ministry. The price was $76.84 a barrel on Monday. The Indian basket represents the average of Oman, Dubai and Brent crude.

Is there a cause for concern?

The worry over crude oil prices stems from India’s energy needs being primarily met through imports, with the country importing 214 million tonnes of crude oil in 2016-17. Extreme volatility has marked crude oil prices, which reached a record $147 per barrel in July 2009.

What does this mean for the Indian economy?

That crude oil price is continuing to advance in global markets is bound to impact India’s oil import bill and trade deficit. Lower oil prices had dramatically improved India’s terms of trade in 2015-16, thus boosting India’s gross domestic product (GDP).

A sharp spike in the price of oil will also reverse the declining trend on inflation and put pressure on central and state governments to cut taxes on petrol and diesel, which is likely to adversely impact their non-goods and services tax revenue. This is also expected to keep margins of state-owned refiners under pressure as they seek to absorb some part of their cost from being passed on to consumers and, in the process, impact the central government’s dividend income.

What is the oil price outlook?

With crude oil accounting for about 90% of the production cost of auto fuel, experts believe that the global oil prices will remain firm with Opec looking to extend its cooperation with Russia on production cuts. This assumes significance, given that Opec accounts for around 40% of global production and India is one of the major Opec consumers. Experts also say that in the event of any trade war escalation, global economic growth could slow down and result in softer commodity prices, including that of oil.

What is India’s strategy?

India has been seeking reasonable rates as its energy demand grows. New Delhi is also reworking its import strategy by stepping up the share of short-term contracts whenever the market is favourable and exploring long-term supply deals at discounted prices. The new energy architecture also involves acquiring hydrocarbon assets abroad and diversifying India’s supply sources from geographies such as the US and adding renewable energy sources to its energy mix to tackle possible price shocks

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