Petrol and diesel prices have increased by nearly ₹4 per litre following back-to-back price hikes over the past week. With crude oil prices still above $100 and no end in sight to the conflict in West Asia, at least two independent analysts have said retail fuel prices will have to increase by another ₹11-14 per litre to curb the losses of oil companies.
Mint explains why more fuel price hikes are probably on the way and what it means for consumers.
Why are more fuel price hikes needed?
The simple reason is that oil marketing companies — Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd — are still making losses on sale of petrol and diesel as crude prices have shot up above $100 a barrel from around $70 before the conflict began in February — a 39% increase. Retail fuel prices have only increased by around 3% so far.
At least two independent analysts, from Kotak Institutional Equities and Bernstein, suggested further price hikes of ₹11-14 were necessary to curb oil marketing companies’ losses. Government estimates show these three firms have been collectively losing ₹750 crore a day due to price under-recovery. While the extent of the consumer pass-through remains unclear, fuel prices are likely to rise even further.
How India reacted in the past?
An analysis by Venugopal Garre and Nikhil Arela of Bernstein on 19 May suggested the price hikes undertaken so far are the second-lowest compared to previous hike cycles.
During the 2022 energy crisis sparked by the Russia-Ukraine war, fuel prices were hiked by 11%. In 2013, when oil prices rose and the rupee fell against dollar, fuel prices were hiked by around 20%.
The current hike of 3.2% is significantly lower, suggesting that there is room to pass on more costs to consumers based on precedent, although there is no guarantee that the current crisis will follow previous trends.
What does this mean for automakers?
The automobile sector is naturally among the first to be affected. Bajaj Auto said earlier this month that the anticipation of fuel price hikes is already dampening consumer sentiment and delaying purchases.
Commercial vehicle manufacturers also expect a slowdown as fleet operators defer purchases until prices stabilize. According to current industry estimates, sales growth in two-wheelers, commercial vehicles, and tractors is expected to moderate this financial year, driven in part by increasing fuel costs.
Could this boost the adoption of electric vehicles?
With the total cost of owning a petrol or diesel vehicle rising, there is an expectation that electric vehicle (EV) sales will increase in the coming months. There are already signs of an uptick, with two-wheeler EV penetration at 9.6% in March and 7.8% in April compared to 6.5% in February, before the war broke out. In cars, penetration rose to 5.1% in March and 5.7% in April from 3.4% in February.
Analysts at Nomura wrote in a 9 March note that fuel price hikes threaten to negate the benefits of last year’s GST cuts as the total cost of owning a vehicle will increase significantly. “One benefit of higher oil prices could be a quicker shift in consumer sentiment towards EVs,” they wrote.
How will more fuel price hikes affect consumption?
Fuel price hikes are expected to push inflation up. If oil prices average $100 a barrel this fiscal year, inflation is expected to touch 5% levels (it was 3.48% in April). Higher inflation will hit household savings and consumer sentiment. With lesser disposable surplus in the hands of the consumers, demand will fall. That will be bad news for India Inc as it is betting big on domestic consumption to fuel growth this year.
So far the West Asian crisis triggered a supply and price shock, but if oil prices remain high and the government passes on the pain to consumers, we could see demand being destroyed.