Crude oil prices have surged past $100 a barrel, increasing by about $45 per barrel after the US and Israel attacked Iran on 28 February. While several global economies, from the US to China, have already passed on higher costs to consumers, India has kept prices stable. With crude prices surging, oil marketing companies (OMCs) are taking a big hit. How long can the government avoid an increase, and what are its implications? Mint explains
Has oil and gas supply disruption worsened?
Yes. What began as a supply disruption due to effective closure of the Strait of Hormuz by Iran is now fast becoming a case of supply destruction. As the West Asian crisis enters the third week, the US and Israel have begun attacking Iran’s oil and gas infrastructure—something they avoided till recently.
Israel has struck Iran’s South Pars gas facility recently, while Iran has retaliated by attacking regional energy assets of neighbours, including bombing of Qatar’s Ras Laffan gas facility. These developments have intensified supply concerns, pushing crude prices to around $110 per barrel levels.
Has India passed on the higher energy prices to consumers?
The government raised the prices of liquid petroleum gas (LPG) on 7 March after crude oil prices began to increase sharply. A ₹60 increase was announced for 14.2 kg cylinders used by domestic consumers, and a ₹115 increase was made for 19 kg cylinders used for commercial purposes.
The government retained the PM Ujjwala Yojana subsidy at ₹300 per domestic cylinder for up to 12 refills per year. However, it refrained from increasing the petrol and diesel prices. With elections announced in four states and a union territory, any increase will now be a political decision.
Have other countries increased prices?
Yes, widely. The US has seen an average increase in petrol prices of 20%. On 10 March, China announced a fuel price hike, the largest since March 2022. Petrol-diesel prices rose by about 3.7%. Fuel prices in the UK are at an 18-month high. Financially broke Pakistan has raised petrol and diesel prices by up to 20% while Sri Lanka, recovering from an economic crisis, has also put through a 8% increase.
What is the impact on oil marketing companies (OMCs)?
According to a study by Elara Securities, every $10 per barrel increase in crude oil prices will shave off ₹6.3 per litre of petrol and diesel margin for OMCs. For LPG, it is ₹10.2 per kg.
With crude oil prices rising by over $45, OMCs are taking a big hit. Even for LPG, the announced price hike covers only about 50% of the cost increase. Crude at $100 will cause OMCs' earnings to erode by 90% to 190% if there is no retail price hike, the study added.
How long can the government avoid a fuel price hike?
Not indefinitely. It does have a buffer in terms of excise duty which is ₹19.9 per litre for petrol and ₹15.8 per litre for diesel. Experts say retail petrol and diesel prices can be fully protected through excise duty cuts up to $110 a barrel.
For now, the government has not announced any plans to cut excise duty and OMCs are footing the bill. Any further increase in oil prices will force India to shift the burden from OMCs to consumers through a fuel price hike.