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Here’s why there is a sharp surge in petrol, diesel prices

Global oil prices are half 2014 levels, the rupee has been largely neutral against the dollar, but the prices of petrol and diesel — which change ‘dynamically’ on a daily basis — continue to be the highest in nearly 3 years. The Indian Express explain why

Written by Anil Sasi , Sandeep Singh |
Updated: September 15, 2017 8:57:10 am
petrol price up, diesel price, petrol, petrol india price, petrol price rise, diesel price rise, petrol news, petrol hike, indian express news, india news, The exchange rate impact has been largely neutral during this period — the rupee was trading at 61.76 against the US dollar on March 1, 2014; it was 63.90 on September 11, 2017.

The sharp surge in the prices of petrol and diesel since June 16, when the “dynamic” daily pricing model for these fuels was introduced, has triggered some uproar, forcing union Petroleum Minister Dharmendra Pradhan to explain on Wednesday. While Pradhan maintained that the government does not plan to intervene to control prices, which have reached their highest in nearly three years, he remained non-committal on effecting a cut in excise duties — asserting this was “up to the Finance Ministry”.

What has been the trend in fuel prices?

On March 1, 2014, a couple of months before the NDA government came to power, the Brent crude price was $ 108.6 per barrel, and petrol cost Rs 73.16 a litre in Delhi. On September 11, 2017, Brent crude was trading at $ 54.2 per barrel — but the price of petrol in Delhi was nearly the same as 42 months ago, at Rs 70.30 per litre.

The exchange rate impact has been largely neutral during this period — the rupee was trading at 61.76 against the US dollar on March 1, 2014; it was 63.90 on September 11, 2017.

The dynamic daily pricing model has come in for flak because, ever since it was implemented, the price of petrol has gone up from Rs 63.09 in July (weighted monthly average of petrol retailed by Indian Oil Corporation in Delhi) to Rs 70.39 on September 14 — an increase of 11.6%.

Diesel prices have surged similarly, and the trend has been identical in other cities. During this period, however, the so-called Indian basket of crude has gone up 12.5 per cent.

So, how is the Indian crude basket calculated?

The Indian basket of crude oil represents a derived basket comprising Sour Grade (Oman and Dubai average) and Sweet Grade (Brent Dated) of crude oil processed in Indian refineries (in the ratio of 71.03:28.97). Prices of petrol and diesel have been made market-determined effective June 26, 2010 and October 19, 2014, respectively. Since then, the Public Sector Oil Marketing Companies (OMCs) are supposed to take appropriate decisions on the pricing of petrol and diesel, in line with international product prices and other market conditions such as exchange rate and the demand-supply situation, among others. On June 16, 2017, the dynamic daily pricing was introduced.

What explains the divergence in the movements of the crude basket and of retail prices?

With global crude oil prices plummeting to record lows when it took charge, the NDA government resorted to a series of excise duty hikes in the second half of 2015 and the initial months of 2016 on both petrol and diesel to help shore up finances. This has helped the Centre realise higher central excise duties (total estimated revenue from the taxes on fuels this fiscal, including cess on crude oil, additional excise duty on motor spirit and diesel and SAD on motor spirit is about Rs 1,15,000 crore), primarily through the increased tax on petrol and diesel, which are still outside the ambit of GST.

Excise duty on petrol was Rs 9.48 per litre in April 2014, which after several rounds of hikes between 2015 and 2016, has risen to Rs 21.48. Similarly, the excise duty on diesel was Rs 3.65 per litre in April 2014, which after excise duty hikes, has risen to Rs 17.33 per litre. In India, the share of taxes in the retail selling prices of petrol and diesel (as on July 16) were 55.5% and 47.3% respectively, with central taxes (essentially excise duty) accounting for the bulk of it.

What other variables are involved?

The price is determined not only by the movement of crude oil price (the main raw material), but also by the rupee/dollar exchange rate and demand-supply situation in the market. While a deficit of the product leads to a rise in its price, an increase in supply will lead to a decrease. Over the first nine months of calendar year 2017, the global crude oil price for the Indian basket fell by 0.44% while the price of petrol (in Delhi) came down by 0.3%. This is despite the fact that the rupee strengthened against the dollar by nearly 7%, something that would have translated into sharply cheaper imported oil.

How has the government justified the excise hikes?

While defending the higher duty, Pradhan has said increased revenue was only going into welfare activities of building more roads, and providing irrigation and drinking water facilities. He said oil companies would continue to have pricing freedom. “Government has no business interfering in the day-to-day affairs of the companies,” Pradhan said on Wednesday after meeting top executives of state oil firms.

Finance Minister Arun Jaitley, in an intervention in Rajya Sabha on December 16, 2015, had said that “one part of the fall in oil prices as a part of proper economic and fiscal planning goes to the consumer; the second part is going to developmental activities, particularly national highways and rural roads, because those who consume petrol and diesel drive vehicles on these roads, and they must pay for it. The third part is being consumed by the states by way of VAT. Of what the central government gets, 42% is being passed on to the states. And the fourth part, let me tell you, goes to the oil companies for the reason that when oil companies make international purchases against future purchases, they suffer a huge loss. They buy at 80 dollars; by the time they sell, the price has become 60 dollars. At one stage, the loss of the oil companies was as high as Rs 40,000 crore.”

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