Why Petrol, Diesel Prices Are High, Despite Low Crude Oil Prices
Currently, from the last few days, the retail prices of petrol and diesel are rapidly increasing and have touched an all-time high. The last announcement made by the government regarding the price of Petrol and Diesel were settled at petrol was selling at 75.30 Rs/litre, while diesel is at 81.32 Rs/litre. This time a litre of petrol became 57 paise more costly whereas the price of diesel rises by 59 paise per litre.
In various industries and sectors including transport and petrochemicals, Petroleum products are used as raw materials. Many factories use these products to operate machinery or generators. If there are any fluctuations in the price of petrol and diesel, then it also brings huge impacts on the production and transport costs of various items. Currently, India is having the highest prices for petrol and diesel in comparison with other countries.
A few days ago the prices increased and now on Monday again the prices have increased. All these changes are happening because of the revisions began after the 82-day hiatus, petrol and diesel prices were increased. It has been the highest level from the last 21 months, despite crude oil is still under $41 a barrel (Brent).
As per reports, one reason behind the increase and decrease of Petrol and Diesel price is that: Oil price decontrol is a one-way street in India because when global prices of these Petroleum products goes up, then this is passed on to the citizens of the country who will be paying for every litre of fuel consumed. Meanwhile, when the reverse case occurs and prices go down, then the government by default charges fresh taxes and levies on its citizens to ensure that it takes in extra revenues. So even if the prices go down, the consumer needs to pay shortchanged prices and be forced to pay more even if the price slopes decline. In this case, the government is the key beneficiary of price decontrol.
Now Due to ongoing coronavirus pandemic and lockdown, the country has suffered a huge economic loss as the economy of India declines. But now the government has announced the Unlock 1.0 and economic activities are picking up. Government has allowed people to open their shops to bring the economy back on track while at other hand oil marketers are passing on the tax burden to the customers.
According to resources, the Oil marketing company announced that due to huge loss, the company is increasing the prices. If the rising trend continues, oil companies will have a big increase in excise duty on petrol and diesel and by next month they will start making losses on the sale of petrol and diesel. The increase in prices aims to balance the losses incurred.
In India, the retail fuel prices are determined or calculated as per the fuels in global markets, not that of crude oil per se. If the demand-supply situation of these products in global markets has some changes in the retail price of auto fuel in the market. Despite that, crude oil is about 90% of the cost of these refinery products, which makes it the biggest determinant of retail fuel price.
Fuel retailers Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd, and Hindustan Petroleum Corp. Ltd, they revised the price of fuels at 6 am daily at petrol pumps. So to set the prices of petrol and diesel, Indian oil companies consider trade parity pricing, based on prevailing prices of these products in the international market.
In India, the price of petrol and diesel are regulated by the government, which means that the government is the one who decides the retail price. The government has deregulated the prices of petrol in 2010 and diesel in 2014. Oil marketing companies are allowed to determine the price of these petroleum products, and they can revise them every fortnight.
From the last few years, prices for petrol and diesel have been revised daily. The motive was to do the daily revision and that will reduce the volatility in retail prices and through these steps they can protect the consumers against sharp fluctuations. As per the reports, over 50% of the retail price of petrol is determined by the central and states taxes and the dealer’s commission.
Currently, from the last few years, India is importing 84% of the petroleum products which are consumed in the country. This simply means that if there are any changes in the global prices of crude oil then it will have an impact on the domestic price of petroleum products.
Under the Constitution, the central government of India has access to some powers that means they have the power to control the tax applied on the production of petroleum products, whereas the states have the power to tax their sale and it varies from state to state. Petroleum has been always put aside from the preview of the Goods and Services Tax (GST), till the GST Council decides. From the last few decades, the central government has used several taxes to prevent sharp fluctuations in the retail price of diesel and petrol. In the past, when global crude oil prices have increased, it led to the cutoff in duties. Since 2014, the value of global crude oil prices declined, excise duties have been increased.
Due to the increase in duties, the central government’s has increased the revenue from excise on petrol and diesel annually at a rate of 46% between 2013-14 and 2016-17. At the same time, the total sales of tax collections of states (from petrol and diesel) have increased by 9% annually.
Demand and supply affecting the price
The law of supply and demand is an economic theory which explains how supply and demand are related to each other and how it affects the price of goods and services.
There is an inverse relationship between the supply and prices of goods and services in case when demand is unchanged. If the supply of goods increases while demand remains the same, then the price of that goods and services will fall to a lower equilibrium price and a higher equilibrium quantity of goods and services. Meanwhile, if the supply of goods and services increases and demand remains the same, then the price of goods and services will rise to a higher equilibrium price and a lower quantity of goods and services.
There is an inverse relationship between the demand for goods and services and the price. However, when there is an increase in demand and supply remains the same, then the higher demand leads to a higher equilibrium price and vice versa.
Factors Affecting the Price of petrol and diesel in India:
- Price Charged to Dealers: IOCL, HPCL & BPCL is having the power to charge a marginally different price for the dealers. The price is decided based on many factors including global crude oil price of the Indian basket, price incurred on freight, the exchange rate of the US dollar, price incurred on refining etc.
- Central Excise Duty: this is levied by the central government and in this, the government decides a fixed amount to be charged from citizens and not a percentage on the price.
- Dealer Commission: this includes an amount of commission paid by the Oil Marketing Companies to the petrol pump dealers and the dealers have to manage all their expenses with this commission.
- State Specific VAT/Sales Tax: The state governments levy a Value Added Tax (VAT) or Sales Tax on the price received after adding dealer price, Central Excise Duty & dealer commission.
However, after the rise in the prices of petrol and diesel, people are suffering a loss as due to the COVID-19 pandemic, many people have lost their jobs and the rise in prices of fuels will make their lives hard. So people are expecting that in the coming few days or till next month the government might reduce the prices