Why are the Prices of Petrol and Diesel Sky High?

After what was a year lockdown, 2021 started with a promise of things going back to normal. The nation slowly made its way out of the lockdown as life started to pick pace. Public places, offices, and malls reopened with necessary social distancing guidelines. And well to get to the public places, offices, and malls what do you need? A vehicle – car or a scooter! Right, and what do the vehicles run on? Petrol and diesel!

The consumers have been paying for petrol and diesel through their noses as the price hikes continue to be unabated. The retail prices have wildly fluctuated and revised many times in 2021 itself. At some places in the country, branded/premium or additive mixed petrol has already crossed the ₹100 mark. Regular petrol has crossed the ₹90 mark in many places and moves its way to the ₹100 mark.

In today's article, we will try to understand why the prices of petrol and diesel are rising in India?

Let's get started.

What are the current prices of petrol and diesel?

As of February 23, 2021, the petrol and diesel price as charged by Indian Oil Corporation Limited (IOCL) are as follows:

A few days back, the Union Oil Minister Dharmendra Pradhan quashed the possibilities of cuts in excise duty and exclaimed that the retail pump rates are significantly governed by international prices (because India depends on imports – at 85% - for meeting its needs). The Union Oil Minister is correct in theory – the fuel price in India is contingent on the international crude oil prices. There is a direct proportion between the price of a barrel of crude oil and the Indian fuel prices. If a barrel price goes up, so does India's fuel price (and is supposed to happen vice versa).

It is interesting to note that while any surge in the crude oil prices is promptly passed onto the customers, it is not reduced when the crude oil prices dip.

What are the components of the ₹/litre price of petrol and diesel?

Ever wondered what you actually pay for when you fill petrol/diesel at a pump? Let us give you a snapshot of the cost structure of a litre of petrol. (Note: The following data pertains to the cost of one litre of petrol and diesel in New Delhi on February 16, 2021):

So, you see? A significant chunk of what you pay for petrol and diesel is actually excise duty and taxes. The remaining price comprises the base price of the fuel, dealer's commission, and freight. Excise duty is charged by the Union government, while State governments levy VAT. 

So, why are the petrol/diesel prices rising?

We have already tapped into the direct proportion price of a barrel of crude oil and the Indian fuel prices which essentially (in theory) means that the retail petrol/diesel prices are decontrolled. So, the government increases the retail prices if the price of one barrel goes up, and when the price falls, new taxes and levies are slapped to ensure ranking of extra revenues. 

As the world came to a standstill in the light of the COVID-19 pandemic, prices fell. As the economies reduced travel restrictions and the factory output picked up, the global demand improved, resulting in a recovery in prices. 

Between June and October, Brent crude traded at (about) $40 per barrel. The trade saw a rise in price to $60 per barrel as the rollout of the COVID-19 vaccines gained momentum. Another key factor contributing to rising prices is the controlled production of crude amid increasing demand. Saudi Arabia voluntarily cut its daily output by one million barrels to 8.125 million barrels per day.

When the lockdown disrupted the global economies, Brent crude fell to a low of $19 per barrel in April last year. Indian consumers were supposed to benefit from this, right? Right! But the government hiked the excise duty (₹13 per litre on petrol and ₹16 per litre on diesel) a suit which was then followed by some states that increased VAT. 

The taxes now account for more than half of the price charged at a pump. As we saw in the cost breakup data of Delhi, nearly 60% of what a consumer pays for a litre of petrol goes to the government in taxes. In the case of diesel, taxes comprise 54.6% of the price. Delhi prices are still lower than in Nagarbandh (Madhya Pradesh) and Ganganagar (Rajasthan), where the tax levies are relatively higher.

Is the increase in taxes the only reason for rising prices?

The Oil Marketing Companies (OMCs) put a halt on petrol/diesel prices daily revisions for a record 82 days starting from March 16, 2020, when the international crude prices hit the lowest. The OMC executives explained that bringing down the prices in tandem with global prices would have led to OMCs' negative margins. The OMCs are notionally free to set petrol/diesel prices based on international prices. While that is the case, hikes in taxes and levies mean that the consumer has not benefited from reduced international prices and ended up bearing the downside of increasing crude oil prices.

How will these hikes affect Inflation?

Many experts have noted that the rising fuel inflation has been counterbalanced by declining food inflation. However, consumers who spend significantly on travel are experiencing the pinch of higher prices despite the overall inflation falling to 4.06% in January. This means that the urban population would be impacted more than the rural population. It is worth noting that a weak monsoon may result in rural India being hit, and the farmers may have to rely more on diesel-powered irrigation.          

The Bottom Line

Automobile fuels – petrol and diesel – their retail prices have reached record highs across the country. Heavy taxes and levies comprise the prices. What is evident is that the oil price decontrol is a one-way-street where the consumer pays the ultimate price!

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