Petrol prices hike up

Petrol prices hike up

Kamaraj IAS Academy | Petrol prices hike up
  • September 11, 2018, 3:14 pm

Petrol prices hike up

IN NEWS

The petrol prices have gone up by around 5% since August 1, while the diesel prices have gone up by 7%.

How did it come about?

There is no strict rule that lower international crude oil prices must lead to lower domestic fuel prices. This is because, under a free pricing regime, petrol and diesel are priced according to what consumers are willing to pay rather than based on input costs. At the same time, there are other ways in which input costs can indirectly influence the retail price.

When the price of crude oil is high, oil companies are forced to cut down on their supply to the retail market in order to drive up the prices to competitive levels. It is worth noting that crude oil prices have been on an upward trajectory ever since January 2016 when it hit rock bottom; the agreement between members of the Organisation of the Petroleum Exporting Countries (OPEC) to cut down production in late 2016 has added to its momentum.

High taxes are another factor that can discourage producers from bringing enough supply to the retail market, leading to higher prices. This has predominantly been the case in India. When crude oil prices fell drastically in 2014 and 2015, for instance, the government increased the amount of taxes by more than ?10 a litre on both petrol and diesel. While this increased the amount of revenue collected by the government, it prevented retail fuel prices from falling as much as international crude oil prices.

Why does it matter?

The rising prices of petrol and diesel increase the burden on citizens, affecting to some extent the government’s popularity. It also quite often brings into question the government’s policy when it comes to taxing basic fuels. More than half of the money that is paid by the consumer goes to the government in the form of taxes. Some have speculated that the government might compromise on its fuel deregulation policy, which allows oil marketing companies (OMCs) to price their output freely.

Not surprisingly, the shares of the government-owned OMCs have witnessed a sharp fall in recent weeks. The current price rise will thus act as a litmus test for the government’s commitment to reforms in the energy sector. Further, to the extent rising fuel prices have to do

Is there a cause for concern?

The worry over crude oil prices stems from India’s energy needs being primarily met through imports, with the country importing 214 million tonnes of crude oil in 2016-17. Extreme volatility has marked crude oil prices, which reached a record $147 per barrel in July 2009.

What does this mean for the Indian economy?

That crude oil price is continuing to advance in global markets is bound to impact India’s oil import bill and trade deficit. Lower oil prices had dramatically improved India’s terms of trade in 2015-16, thus boosting India’s gross domestic product (GDP).

A sharp spike in the price of oil will also reverse the declining trend on inflation and put pressure on central and state governments to cut taxes on petrol and diesel, which is likely to adversely impact their non-goods and services tax revenue. This is also expected to keep margins of state-owned refiners under pressure as they seek to absorb some part of their cost from being passed on to consumers and, in the process, impact the central government’s dividend income.

How the petrol price is calculated?

Petrol price is calculated on the basis of worldwide supply and demand factors. Foreign suppliers sell crude oil to Oil Marketing Companies (OMCs) in India at benchmark prices. Delivery price at the refinery and Brent crude’s daily price are considered to calculate actual cost of petrol in India.

One barrel of crude oil contains about 160 litres of oil priced in US dollars. To calculate price, US dollars are converted to Indian rupee and then divided by 160.

After buying, crude oil is transported to refineries in India. India at present has about 20 refineries. Crude oil is then separated into various products like petrol, diesel, coal tar, etc in distillation towers of these refineries. Cost of distillation and refining is added to the price of petrol. Also crude custom levy and charges from ports to the refinery is added.

Separated petrol is now ready to be stored in the storage tanks of the oil companies. Oil companies now pay to the refineries and to this added the cost of transporting petrol from refinery to OMC’s tanks. So the actual price of petrol that a consumer pays includes all the above mentioned cost plus commission of a dealer, VAT, excise duty, total duties and taxes.

Thus petrol price is the cost price that includes procuring, refining and marketing plus taxes that include central and state taxes.

What is India’s strategy?

India has been seeking reasonable rates as its energy demand grows. New Delhi is also reworking its import strategy by stepping up the share of short-term contracts whenever the market is favourable and exploring long-term supply deals at discounted prices. The new energy architecture also involves acquiring hydrocarbon assets abroad and diversifying India’s supply sources from geographies such as the US and adding renewable energy sources to its energy mix to tackle possible price shocks with the decreasing supply in the world market, it has a negative impact on economic growth.

What lies ahead?

The price of domestic petrol and diesel going forward is likely to depend on the price of crude oil in the international market as well as the policy preferences of the government as it heads into a series of elections in 2018 and 2019. While rising geopolitical tensions have been used to explain the rise in crude oil prices this month, where oil prices are headed next is anybody’s guess.

The oil bulls believe that OPEC countries will drive oil prices even higher in order to meet their increasing revenue needs. The sceptics of the recent rally, on the other hand, expect American shale oil producers to rein in any further rise in oil prices quite soon. If international crude oil prices fail to stabilise or fall, the government may decide to look at either reducing taxes on these fuels or forcing OMCs to incur losses by selling at lower prices.

 

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