Fuel prices aren't going down anytime soon and there isn’t much India can do about it


  • In the state of Maharashtra, where fuel is the most expensive owing to high VAT levied on it, petrol per litre crossed the ₹90 mark this week while diesel neared ₹79 per litre.
  • Yesterday, the price of Brent crude reached a four-year high of $81.39 per barrel. The price is expected to go higher as the OPEC and Russia refuse to raise output.
  • As oil prices climb higher, Indian refiners will reduce their imports, keep inventory low and jointly look for cheaper sources of oil.

To almost no one’s surprise, petrol and diesel prices in India hit new highs this week. In the state of Maharashtra, where fuel is the most expensive owing to high VAT levied on it, petrol per litre crossed the ₹90 mark while diesel neared ₹79 per litre. The state’s Congress committee was quoted as saying that fuel should now be made a wedding gift given how expensive it’s become.

While the Opposition and critics alike have called on the BJP-led government at the centre and state level to reduce taxes on fuel, the high domestic prices are a reflection of the state of the global market for crude oil. Yesterday, the price of Brent crude reached a four-year high of $81.39 per barrel amid a reduction of exports from Iran.

This price level was just 9 cents short of the previous high of $81.48 seen in November 2014, after which prices began a steady decline. After oil prices dropped to record lows in 2016, the OPEC and Russia struck an agreement in late 2016 to reduce supply.

And now, it looks like global oil prices will continue their upward trajectory for two reasons.

Firstly, supply will be curtailed as a result of sanctions on Iran by the Trump administration, which will reduce the country’s oil exports. Secondly, the cartel of oil producing countries, OPEC, as well as Russia have refused the US’s proposal to increase supply to make up for the fall in Iranian exports, which would have led to a stabilisation of global prices.

As oil prices climb higher, how will Indian refiners respond?

They will reduce their imports, keep inventory low and rely less on spot purchases. They currently source 30% of their oil requirements through spot purchases, in which oil is bought at its market price at the time of the transaction as opposed to a forward contract, wherein the commodity is bought at a pre-specified price on a future date.

Indian refiners will also collaborate to find cheaper sources of crude oil. They will keep up with their purchases from Iran, whose crude oil is cheaper than that of other oil producing countries, by paying in Indian rupees through domestic banks which have no exposure to the US.

Meanwhile, analysts expect oil to cross the $100 per barrel mark as US sanctions kick in on 4 November and OPEC remains stubborn about raising production. This will be further exacerbated by a downturn in the production of US shale and a slump in crisis-hit Venezuela.
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