Petrol Price

How does the price of petrol change as it travels from ports to pipelines to pumps? What is the politics and policy of fuel prices in India? Here is all you need to know about the economics of the fuel that powers our machines and enables us mobility.

What are the factors that influence the price of petrol?

The price of Crude oil: Crude oil price is the most significant aspect that impacts the price of petrol. There is no doubt that the price of the finished product is primarily constituted by the prices of raw materials, thus, any changes in the prices of crude oil has a direct impact on the price of petrol in India.

The prices of crude oil too depend upon a number of factors ranging from the grade of the oil, the geo- political scenario and future supplies and reserves.

Forces of demand and supply: Petroleum is an exhaustible energy resource with limited availability, deriving its origin from fossilised fauna that turned into crude oil under extreme heat and pressure. Moreover, the distribution of petroleum is uneven across the world.

Petrol is produced by processing crude oil hence, the limited availability of this fuel coupled with uneven distribution across the world leaves the prices of the product at the mercy of market forces of demand and supply. A rise in demand or fall in supply spikes the prices of petrol while a fall in demand or rise in supply pulls the prices down.

In the natural course, the prices go higher as the population is rising continuously, increasing the demand for the fuel with more and more vehicles hitting the road each day.

Do domestic price of petrol and diesel change to the same extent as that of the global crude prices? The answer lies in the other factors that impact the price of the domestic fuel in India.

Taxes levied: Apart from the economic forces controlling the prices of petrol, there are aspects of governance too that decide the cost of petrol before it lands in the fuel tanks of our cars.

Governments at the central level as well as the state level levy myriad taxes from import and production to sale of petrol. The companies that hold stake in the production and supply of petrol revise and adjust their prices according to the taxation policies to gain marginal returns and recover losses.

Dollar exchange rate: The rupee to dollar exchange rate has a huge impact on petrol prices in India. The US dollar is used as the standard currency for transactions pertaining to oil trade in the world. Therefore, any revision in the exchange rate has a direct impact on the prices of petrol in the country.

Refinery consumption ratio: Based on the level of technology, grade of oil and size of the unit, oil refineries have different consumption ratios against the amount of fuel they produce. The consumption ratio of the refineries also impacts the price of petrol.

Why is the price of petrol in India different from other countries?

The price of petrol varies from one country to another and there are a plethora of factors causing this variation.

One or a combination of following factors cause the variation in prices between India and other countries-

Existing reserves

Currency exchange rates

Taxation policy

Government subsidies

Market speculation dealing or oil futures

Regulations related to petroleum products

Proximity to resources or conflicts

International agreements and embargos

What determines the retail price of petrol?

There are a number of factors that determine the price of petrol and all the factors are neither exclusive nor free from the interplay of external forces. So, how can one go across the labyrinth of agents impacting the price of petrol and calculate the cost along the supply chain?

The retail price of petrol can be calculated by adding up the price of crude oil, processing costs, profit margins of the oil marketing companies, freight costs, excise duty and the different taxes levied by central and state governments.

So here is the list of costs that sum up to determine the retail price of petrol-

Cost of Crude oil

Processing cost to extract petrol from crude oil by oil marketing companies

Profit margins of oil marketing company and dealers’ commission*

Transportation and freight costs

Excise duty imposed by the central government

VAT (Value added tax) imposed by state governments

The commission varies a little with the location of fuel pumps. 

-Different states impose VAT at different rates thus, the price of petrol varies from state to state.

 What is the frequency of change in petrol prices in India?

Petrol prices in India change on a daily basis at 6:00 AM.

Is India ‘Atmanirbhar’ for its fuel supply?

No, India is dependent on imports for a large share of petrol supply in the country. Between 2014 and 2022, on an average India has imported 117.62 million tonnes of petroleum.

India imported a record high of 21.10 million tonnes of crude oil in October 2018 and a record low of 12.34 million tonnes in July 2020.

(Source: Ministry of Commerce and Industry)

Does India export fuel to other countries?

Although India imports large quantities of crude oil to meet its domestic needs, with a large refining base India has started exporting fuel oil too.

In the last 5 years, between 2017 to 2022, India exported an average of 1.82 million tonnes of fuel oil annually.

(Source: PPAC)

Sufficient refining capacity in the country makes India a net exporter of petroleum products. However, certain petroleum products (for example LPG, Lubes/LOBS etc.) are imported mainly due to the deficit in production, refinery shutdown, technical and commercial considerations and so on.

How much crude oil does India refine?

As per the Petroleum Planning and Analysis Cell (PPAC) of India there are 26 oil refineries in the country out of which 20 are public sector undertakings (PSUs) and 6 are Joint ventures or private units.

According to the production data for FY21-22, public sector refineries produced 143.91 million tonnes of refined oil, and joint venture and private refinery units produced 107.30 million tonnes of refined oil. In total 26 oil refineries of India produced 251.21 million tonnes of oil.

(Source: PPAC)

Why is petrol being doped with ethanol?

Ethanol is one of the principal biofuels, which is naturally produced by the fermentation of sugars by yeasts or via petrochemical processes such as ethylene hydration.

Ethanol Blending Programme (EBP) is aimed at reducing the country’s dependence on crude oil imports, cutting carbon emissions and boosting farmers’ incomes.

Ethanol blending in petrol in India has risen successively from 1.53% in 2013-14 to 5% in 2019-20 to 8.10% in 2020-21 and now to as much as 10.17 %. By April next year, India will start supplying petrol with 20 % ethanol at selected petrol pumps. The step is aimed towards cutting oil import dependence and addressing environmental issues.

As per the data from oil ministry, 2 million tonnes of crude oil was substituted due to the blending of ethanol in petrol during the first three and half months of the current fiscal year that began in April, 2022.

What is windfall tax and why is it imposed on petroleum?

In simple terms, windfall tax is a tax on those profits of a company which have been derived from the factors that have not been propelled by the company. The government usually levies a one-time tax over and above the normal rates of windfall gains.

In July this year, due to the hike in oil prices on account of the Russia- Ukraine war, oil marketing companies derived more than normal profits from the trade. Therefore, the government had imposed a windfall tax on the companies amounting to Rs 6 per litre or $12 per barrel on petrol and aviation turbine fuel (ATF), while it imposed Rs 13 a litre or $26 a barrel on diesel. The government imposed Rs 23,260 per tonne or a $40 per barrel windfall tax on crude production.

Three weeks later the government reduced the windfall tax scrapping a Rs 6 per litre tax on the export of petrol completely and reduced the same on aviation turbine fuel (ATF) to Rs 4 a litre. Besides, the tax on diesel has been reduced to Rs 11 from Rs 13 per litre. Further, tax on domestically-produced crude has been cut by 27 per cent to Rs 17,000 per tonne.

This windfall tax was levied on oil companies to make up for the gap that was created due to government’s spending on food and fertilizer which had gone up after cuts in Central Excise Duty.

Why do petrol and diesel not come under the GST regime?

Bringing domestic fuels under the GST would effectively mean reducing taxes on them. The highest tax slab under the GST is 28%, while the fuels such as petrol and diesel are taxed at more than 100% as of now.

To understand the politics of taxation of petrol and diesel between the center and the state, we need to understand the difference between the taxation mechanisms of the two.

Central government taxes the fuels at a specific rate using various duties and cess while states use a combination of specific and ad- Valorem rates to tax the fuels. Center shares 41% of its collection with states while states add the whole collection to their respective exchequer.

Both, the Central government, as well as the state governments, do not want to compromise with the present tax collection from petrol and diesel since they form a large part of the state revenue. In addition to that, states do not want the center to hold sole power over the decision of tax rates of petrol and diesel since in the present tax regime they enjoy the benefit of a dynamic rate giving them the liberty to adjust their collection.

Since the revenues of both the Centre and the States will be heavily affected by a lower tax on petrol and diesel, it is unlikely that these fuels will be brought under the ambit of the GST any time soon. Even if these fuels are brought under the GST, there is likely to be a steep rate imposed on them to prevent any loss in tax revenues.