Explained: How lingering Omicron concerns could temper fuel prices

The announcement of a planned coordinated release of emergency crude oil reserves by the United States, China, Japan, India, South Korea and the United Kingdom has also helped curb a year-long rally in crude oil prices, which nearly doubled to $85.5 per barrel in October from $43 per barrel in October 2020. The US had, late last month, announced that it would release 50 million barrels of crude oil from strategic reserves as part of efforts to curb rising crude oil prices.
India announced a release of 5 million barrels of crude oil from strategic reserves, while the UK announced a release of 1.5 million barrels of crude oil.

How will the fall affect domestic fuel prices?

If Brent crude prices remain at current levels, Oil Marketing Companies (OMCs) will likely begin cutting petrol and diesel prices in line with international prices for petroleum products. The impact of changes to crude oil prices is often seen with a lag, as domestic prices are benchmarked to a 15-day rolling average of global prices of petrol and diesel. However, oil marketing companies have not been strictly following global benchmarks since the start of the pandemic and have at times held prices constant during periods of volatility.

During previous falls in crude oil prices, OMCs have been slow to cut the price of petrol and diesel as they try to make up for lower margins during periods when they have held domestic prices constant during an uptick in global prices. Oil marketing companies had held the prices of petrol and diesel nearly constant despite sharp volatility in international prices during March and April, as a number of states were headed for elections.

OMCs had also held the prices of petrol and diesel constant for 83 days, starting in the middle of March 2020, and international prices crashed in response to a collapse in demand due to the Covid-19 pandemic.

OMCs have also kept the price of petrol and diesel stable since early November, when the Centre announced a Rs 10 per litre cut in excise duty on diesel and a Rs 5 per litre cut in the excise duty on petrol. Most states have also announced cuts in Value Added Tax (VAT) imposed on petrol and diesel. The Centre has still not reversed central taxes to pre-Covid levels, as it had hiked excise duty on petrol by Rs 13 per litre and on diesel by Rs 16 per litre in 2020 to shore up revenues as economic activity fell sharply.

Despite the cut in central and state taxes, the current prices of petrol and diesel are still significantly higher than they were prior to 2021. Petrol is currently retailing at Rs 110 per litre in Mumbai, up 21.7 per cent from the beginning of the year, while diesel is retailing at Rs 94.1 per litre, up 17 per cent in the same period.

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