BackThe curious case of India’s retail transportation fuel prices
State owned oil marketing companies (OMCs) are under pressure due to the continuous rise in crude prices in the wake of Ukraine war
PremiumNEW DELHI : With global crude oil prices breeching multi-year highs in the wake of Ukraine war, there are growing concerns about its impact on retail price of transportation fuel in India. The crisis has posed a clear and present danger for India, the world’s third largest oil importer with an 85% import dependency. Despite being deregulated, petrol and diesel retail prices have held steady in the backdrop of ongoing state assembly elections. Mint takes a look.
# How will high global crude oil prices impact petrol and diesel prices in India?
State owned oil marketing companies (OMCs) are under pressure due to the continuous rise in crude prices in the wake of Ukraine war. While petrol and diesel prices have been largely steady in the past three months, they are likely to increase going ahead. Experts and reports suggest that post the end of the ongoing state assembly elections, retail prices of petrol and diesel may witness a steep rise. In the national capital, the retail price of petrol on Friday was ₹ 95.41 a litre, while diesel was being sold at ₹ 86.67 per litre.
The cost of the Indian basket of crude, which averaged $69.88, $60.47 and $44.82 per barrel in FY19, FY20 and FY21, respectively, averaged $94.07 in February, according to data from the Petroleum Planning and Analysis Cell (PPAC). The average price was $117.39 a barrel on 3 March. The Indian basket represents the average of Oman, Dubai and Brent crude.
# Where are global crude prices heading with intensifying Russia-Ukraine conflict?
Crude oil prices do not seem to be calming down anytime soon in the near term with Brent touching a high of $119.84 per barrel on Thursday, the highest level since 2013. The prices since then have declined, with the May contract of Brent futures on the Intercontinental Exchange (ICE) was trading at $112.16 higher by 1.54% from its previous close. The April contract of West Texas Intermediate (WTI) on NYMEX rose 2% to $109.82 per barrel at the time of writing this story on hopes of a nuclear deal between the US and Iran. The conflict has helped see oil prices see quite a turn-around after WTI prices had turned negative in a first, when most of the world was under coronavirus lockdowns. If the supplies remain disrupted, a recent report by JP Morgan said that prices of Brent may touch $185 per barrel by the end of 2022.
# What will be the impact of high crude oil prices on India’s economic recovery?
This ongoing rally in global crude oil prices will impact India’s oil import bill and trade deficit. Wholesale inflation will see a larger direct impact than retail inflation because of the higher weight on fuel in the Wholesale Price Index. Petrol and diesel have around 2.5% weight in the Consumer Price Index and 13% weight in the wholesale Index. A ₹1 cut in excise duty on petrol costs the exchequer ₹4,000-5,000 crore, while the same for diesel costs ₹14,000-15,000 crore.
# What are the options before the government to keep domestic fuel prices stable?
The government has said that it is monitoring the situation and its impact on the oil prices and the economy closely. One of the options on the table is to reduce excise duty. Mint last week reported that the government is assessing the evolving geopolitical situation and will decide on cutting excise duty on fuels if the current surge in crude price lingers longer than can be absorbed by state-run fuel retailers. Excise duty on petrol and diesel is currently at ₹27.9 a litre and ₹21.8 per litre, respectively, after the duty cut announced in November last year. According to an ICRA report, an excise duty cut on fuels to pre-pandemic levels will cost Centre a revenue loss of ₹92,000 crore in FY23. Also, one of the options before the government is to release crude oil from its Strategic Petroleum Reserves (SPRs), which can support around 9.5 days of crude oil requirement.
# Is there an invisible hand?
Petrol prices were deregulated in June 2010 by the Congress-led United Progressive Alliance (UPA) government. Subsequently, Prime Minister Narendra Modi-led government decontrolled diesel prices in October 2014. While state-run fuel retailers often tend to flatten any sharp spike warranted in petrol and diesel prices by keeping them unchanged during times of high volatility; the government’ stated position has been that it has no role in the pricing. There have been several instances wherein OMCs have refrained from increasing prices in the run-up to elections. In the current scenario, petrol and diesel prices have remained static over three months even though during this time period, the global crude prices have gone up by $35-40 a barrel. This is the most extended duration when the fuel retail rates have remained static since the daily price revision began in June 2017.
Has global intervention helped?
As oil prices shot up to multi-year highs in the past week, both major oil producers and net importers have scrambled to calm the nerves in a highly volatile market. On 1 March, the 31 member countries of the International Energy Agency (IEA) announced their agreement to release 60 million barrels of oil from their emergency reserves. However, the announcement did little to calm the markets, as the Opec-plus grouping comprising 23 countries of which Russia is also a member in its meeting on 2 March decided to maintain status quo and continued with an increase in output by 400,000 barrels per day (bpd) in March.
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