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Why are Petrol and Diesel prices in India souring high even when the global crude prices are lower

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The prices of petrol and diesel have been hiked by over Rs 2 and by nearly Rs 3.50 respectively by the oil marketing companies since November 19, 2020, making the Indian retail fuel prices now standing at their highest level since October 2018. Prior to this surge, the prices of diesel and petrol stood unchanged for 59 days.

As of now, Diesel and Petrol are being sold to consumers at Rs 73.87 per litre and Rs 83.71 per litre, respectively, in Delhi, the capital of Indian subcontinent. On December 9, Wednesday, Mumbai petrol pumps sold petrol at Rs 90.34, according to data released by the Petroleum Planning and Analysis Cell or PPAC.

Why are the prices of petrol and diesel prices rising now?

The optimistic outlook of 2021 and the hopes of getting a vaccine by early or mid-2021, the global crude oil prices seem to see a rise. Moreover, an improved demand outlook for petroleum products is expected as the world is looking forward to jumping back to their pre-covid normal lives once a viable vaccine for the novel coronavirus disease is available. The above-mentioned points are the key reasons behind the recent rise in the prices of fuels globally (petrol and diesel).

Needless to say, the global price surge has directly impacted the price of petrol and diesel being retailed in India since it imports most of the fuel required to meet its demands. The fuel price in the country has been rising in tandem with global prices since forever and the prices at which the fuels are sold in the domestic boundaries are revised by oil marketing companies. They make their decisions based on changes in the international prices of petrol and diesel.

However, with the crashing of the global crude prices and declaring of a nationwide lockdown in India, the Indian OMCs stopped revising and reviewing the prices of petrol and diesel. This avoidance of review continued for over 80 days.

Vivekanand Subbaraman, the analyst at Ambit Capital, says that global crude oil prices have been moving up and the improvement in the demand outlook due to the improving prospects of a vaccine has been reflected in a widening of cracks for petrol and diesel and that the impact of the recent rise in crude oil prices had likely been incorporated through recent price hikes. The crack spreads refer to the difference between the price of a barrel of crude oil and the price of a refined petroleum product (for example diesel and petrol).

How many times has the price of petrol and diesel been revised this year by the Indian oil marketing companies?

According to data released by the Petroleum Planning and Analysis Cell, Since April 1, 2020, the price of petrol has been reviewed for as many as fifty-six times. In other words, the latest 30-paise price hike is the 56th revision of the price of petrol in the national capital. On the other hand, the price of diesel has been revised by the OMCs for the 67th time this year by 26 paise. The fuel prices have been steadily moving upwards all through this year, except for a brief period in the months of September and October when the prices were marginally reduced by the regulators.

Moreover, this surge in prices was partly due to the additional duties and cesses levied by the Centre government nationwide as well as by the state governments individually. In May 2020, the Central Board of Indirect Taxes and Customs had raised the Special Additional Excise Duty as well as the Road and Infrastructure cess on petrol and diesel. This announcement was followed by a similar announcement in the month of March.

But, isn’t the crude still cheaper than at the beginning of the year?

Yes. The crude oil is cheaper right now in comparison to what it was priced at the start of the year. The price of Brent crude has now reached a value nearing to $49 per barrel. This is its highest attained price level since the month of March. At the beginning of the year, the price of Brent crude severely dropped down from $66 per barrel to $19 per barrel in the month of April. This came on account of global restrictions on travel and tourism as countries imposed stringent shutdown and lockdowns to control the transmission of the COVID-19 disease.

So, if the crude is cheaper now, why are the prices of petrol and diesel skyrocketing?

The duties and petrol and diesel have been enormously increased by the central government and a number of state governments. The rise in duty has been justified as a way to boost revenues, especially when the Covid-19 related lockdown severely curtailed economic activity leading to the current price of petrol nearing price levels of October 2018, when the per-barrel cost of India’s crude basket hit $80. A lot of states, including, Tamil Nadu, Delhi, Maharashtra, and Karnataka have also increased the state levies on the fuels since the beginning of the current fiscal in order to boost their revenues and compensate for the losses incurred due to the shutdowns or lockdowns.

In the present, the State and central taxes account for a huge amount of the final retail price paid by the consumer. It accounts for as much as 62% of the final price for petrol and around 57.5% of the retail price of diesel in the national capital.

The excise duty on petrol has been increased to Rs 32.98 per litre by the central government. Before this increment, the same stood at Rs 19.98 at the beginning of the year. The excise duty on diesel has also been increased by the centre from Rs 15.83 to Rs 31.83 per litre over the same period.

By how much have the prices varied in India?

The consumers pay the highest fuel prices In Mumbai in comparison to other metro cities. There, the price of petrol has jumped up by 11% (as against last year) in the month of October. Whereas in Delhi, the price of petrol rose by 10.35% (as against October last year). The Consumer Price Index inflation or CPI for the same period stood at 7.61%.

What are the different components on which the pricing of fuels is based?

The biggest component of the price of petrol in Delhi is the Excise duty levied by the Central government. In fact, since the year 2014, the centre has nearly doubled the receipt of revenues collected from the sales of petrol and oil products. Nearly a quarter of the fuel price is formed of the Value added tax which is collected by the state on the price of petrol as well as on the dealer’s commission.

If put together, these taxes and duties come out to be shocking 63% of the cost of petrol in Delhi, in other words making the base price of petrol amount to less than a third of the final price at which a Delhite purchase it for final consumption from the retailer. If we add the retailers’ commissions and freight charges to the base price, then it will make up only a little over a third of the price.

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