“Petrol! Petrol!” resonated in all pockets of the city, as petrol scores a century! On 17th February, 2021, retail petrol prices crossed the psychological three-figure mark of ₹100 in Sri Ganganagar, Rajasthan and subsequently in Mumbai. Prices have been above ₹90 per litre in most other cities as well. Concurrently, retail prices of diesel have also inched towards all-time-highs of above ₹85. High fuel prices have remained unchanged for 15 consecutive days and customers are paying through their nose, having little hopes for any price-cuts. The issue is acutely turning into a game of political football, thereby triggering unending debates and bickering. Here are all the causes, facts and figures you must know to clearly understand the problem.
Overview Crude oil (also known as ‘black gold’), originally discovered during the industrial revolution, has over time become the single most important source of energy and a crucial component of our daily lives. India is ranked as the third-largest primary energy consumer in the world, after the USA and China, with the petroleum products’ consumption volume being approximately 211.03 million metric tonnes in the fiscal year 2019 (as per the Ministry of Petroleum and Natural Gas). Since inland production cannot suffice this massive demand, more than 80% of the consumption is met via imports. Consequently, any fluctuation in the global Brent crude prices has a direct and sizable impact on the oil prices in the country. Our top crude oil suppliers include Saudi Arabia and Iraq. Understanding the International Factors Like any other commodity, the prices of crude oil are determined by the supply and demand dynamics. Last year, the demand for crude oil saw a steep fall due to the COVID-19 pandemic. In April 2020, crude oil prices collapsed to about $20 per barrel, forcing most of the oil-supplying states to cut down their production. As the economies opened up, prices got restored to $40 per barrel and remained steady for five months until the end of October. However, as the vaccine is rolled out and the demand is expected to improve, the price of Brent crude increased by more than 50% in February 2021 and crossed the $60 per barrel mark. Meanwhile, Saudi Arabia, a major oil-supplier, has announced a production cut to the tune of 1 million barrels per day across February and March to boost oil prices. Theoretically, the petroleum and natural gas minister Mr Dharmendra Pradhan correctly justified the price hike through the above-mentioned international factors. But here’s the catch. The base price of Brent crude oil makes up less than 30% of the total fuel price, implying that only 30% of the fuel prices are benchmarked to international rates. The remaining 70% is then broken down as follows:
Source: Times of India
The imported crude oil needs to be refined into more useful forms like petroleum naphtha, gasoline, diesel fuel, kerosene, liquefied petroleum gas, jet fuel and fuel oils. This is done by dealers like BPCL, HPCL, etc. Additionally, the Centre and State governments charge taxes in the form of excise duty, VAT and cess. The excise duty is fixed and collected by the Centre whereas the VAT is collected by state governments and it differs from state to state. Finally, there is the dealers’ commission. This is a mere amount of ₹1-3 per litre, which is paid to the petrol pump owners. Therefore, there’s no hiding that the taxes claim a lion’s share in the retail price of fuels. The Tax Twist Historically, petroleum prices were subsidised in India between 1947 and 2010, to protect the end-users from international price fluctuations. This implies that end-users never saw a shocking jump in the prices, even when international prices were sky-high. These built-up heavy losses in the books of the government and oil companies. Consequently, from June 2010 petrol prices were deregulated from government control, followed by diesel price deregulation in June 2014. Thereon, fuel prices are daily determined by the oil companies based on international oil prices, plus taxes and dealer commission. Before the pandemic, in early 2020, the excise duty collected on petrol stood at ₹19.98 per litre, whereas on diesel it was ₹15.83 per litre. With the dwindling demand during the pandemic, the steady revenue of the government dipped substantially. As a counter-measure, the excise duty on petrol and diesel was hiked by ₹13 and ₹16 per litre respectively. Similarly, when the international Brent crude oil prices hit a two-decade low in April 2020, the state government too hiked their taxes. Now, even after the crude oil prices have been restored to normal, the taxes remain unchanged.
Source: Times of India
Understanding the plight of states By rule, the Centre has to share close to 41% of their excise collection with the states. One would logically question the states to cut down the VAT. But, there’s a catch. Excise duty is made up of three different components - basic excise duty, special additional excise duty and ‘road and infrastructure cess’. Among these, the Centre does not have to share the cess with the states. Thus, to maximise their revenue, the centre collects a larger portion (close to 90%) of their excise duty in the form of cess. This leaves the states with a very small portion, therefore compelling them to impose a higher VAT along with ‘disaster management cess’ and ‘highway liquor ban cess’. Currently, Maharashtra and Rajasthan are among the few states imposing the highest tax on fuel. A peek into the past
Curiously, a similar hike in Brent Crude Oil was seen in May 2014, when the prices shot up close to $106 per barrel. Despite the high base price, the end customer had to pay only close to ₹70-75 per litre. This is because the taxes then were adjusted to ensure that the customers have to pay a fair price. However, many believe that it is unfair to compare these two time periods because fuels were only partially deregulated in 2014.
Source: India Today Group
The hike in fuel prices not only implies higher personal transportation cost but also has sparked inflationary trends in the prices of essential goods and services. Sales in the automobile sector, though not affected in the short term, are expected to decline if the fuel prices continue to remain high. A restraining trend is already noticed among the price-sensitive two-wheeler buyers. However, given the international supply-cuts, relief to the end-customers is uncertain and far-fetched. On a positive note:
In June last year, the oil ministry tweeted: “Taking advantage of low crude prices due to the COVID-19 situation, India filled its strategic reserves to full capacity," adding that this lead to a forex saving of ₹5000 crores. These reserves act as insurance against price fluctuations. Therefore, we can only hope that if the international crude oil prices are to shoot up again, petrol and diesel prices do not increase further. Also, India is staunchly transitioning from being an ‘oil economy’ to becoming a ‘gas economy’, intending to cut down on imports and become more self-reliant. As part of the energy mix, India is planning to multiply its natural gas consumption from the current level of 6.2% to 15% by 2030. It is currently working towards expanding the Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) facilities across the country since it is a cheaper alternative to petrol and diesel.
Lastly, high prices discourage people from becoming too wasteful in consuming these fuels. This is a common practice in Scandanavian countries, where fuel is kept expensive throughout, to remain more energy-efficient and less polluted.
On that account, if India is to become greener, this might just be worth it. Otherwise, inflation is all set to brew up!