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Explained: Why are oil companies cutting petrol and diesel prices now?

According to sources, OMCs had halted price revisions despite rising crude prices as fuel prices had become an electoral issue in key upcoming state elections in West Bengal, Tamil Nadu, Kerala and Assam.

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
March 25, 2021 12:06:23 pm
A worker fills petrol for two-wheelers at a fuel station in Ahmedabad. Express Photo by Nirmal Harindran

Oil marketing companies on Thursday cut petrol and diesel prices for the second consecutive day after a near six-month period, which saw petrol and diesel prices rising consistently and hitting record highs across the country. OMCs cut the price of petrol by 21 paise to Rs 90.78 per litre and reduced the price of diesel by 20 paise to Rs 81.1 in the national capital on Thursday as the price of Brent crude fell from a peak of $70 per barrel in early March to $63.5 on Thursday.

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We explain the background and trigger for the change in fuel prices.

Why are OMCs cutting fuel prices now?

Oil marketing companies are cutting prices of petrol and diesel after holding them constant for a 24-day period which has witnessed significant volatility in the global prices of crude oil. Sources noted that OMCs had halted price revisions despite rising crude prices as fuel prices had become an electoral issue in key upcoming state elections in West Bengal, Tamil Nadu, Kerala and Assam.

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Experts noted that the freeze in price revisions likely wiped out the Rs 2.5-3 per litre margin that OMCs made on the sale of petrol and diesel as prices reached $70 per barrel but that OMCs would have recouped most of their losses in the recent fall in crude prices and that a cut in prices meant that their margins would have returned to normal levels.

However, the central government has not yet reversed hikes in excise duties imposed on petrol and diesel in 2020 to boost government revenues during the pandemic despite petrol and diesel price still being near all-time highs. The central government had increased taxes on petrol by Rs 13 per litre and taxes on diesel by Rs 16 per litre last year.

West Bengal, Assam, Rajasthan and Meghalaya are among the states that have rolled back hikes in state taxes on petrol and diesel in February.

Why are crude prices falling now?

Both increasing supply of crude oil and concerns about demand have caused the recent correction in crude oil prices which had risen consistently from about $40 per barrel at the end of October to $70 per barrel in early March. Crude oil prices have fallen on fears of new Covid-19 restrictions in Europe and increasing crude oil output from the US.

Crude oil prices continued to rise between October and early March as the OPEC+ group of oil-producing nations decided to continue production cuts despite crude oil prices reaching near pre-covid levels and the US was hit by severe snowstorms in mid-February which led to a sharp fall in US crude oil production. Experts have however noted that rising crude oil prices have accelerated the recovery of crude oil supplies from the US. Besides this, a slow vaccine rollout in Europe has also contributed to concerns about slowing demand.

A move by India to cut oil imports from Saudi Arabia as a response to the country maintaining production cuts despite India calling for a withdrawal of production cuts may also boost crude oil production in the US which emerged as the second most important source of crude oil for India in February displacing Saudi Arabia.

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