Here’s why a crude oil crash won't reflect fast on your petrol and diesel bills
- This is because of the higher fuel duties and higher gasoline cracks that result in petrol prices remaining high in spite of a sharp fall in the global crude prices.
- The Indian retail fuel prices are linked to the price of these cracks in the global markets and not to that of
crude oilper se.
AdvertisementAny other day, people would have been gleeful that US crude oil prices crashed below zero, hoping that their diesel and petrol bills would be lighter. Except that no one is going out to fill their vehicles for the next few weeks. Even if they did, not always do international oil prices reflect on the retail fuel bills of Indians.
This is in spite of the fact that Indian oil majors like IOC, HPCL and BPCL switched to daily price revision of fuel prices from a fortnightly pricing system in 2017. Back then, crude oil then used to cost $46.96 a barrel.
The main reason why retail fuel prices won’t change quickly is because Indian fuel retailers buy most of its Brent crude oil from Saudi Arabia and other Middle Eastern countries. The price of Brent today is at $21.56.
Also, India buys reserves that last 15 days, and the price of the crude basket which has been imported and being refined is at $20.56 a barrel on 17 April, according to the Petroleum Planning and Analysis Cell of India.
This price represents the average of Oman, Dubai and Brent crude for the time it was purchased. This is then refined at various refineries across the country and sent to retail, and all these costs will add through.
Indian government hikes duties on fuel
While $20 a barrel is also a steep low for crude oil, Indians have been gaining little benefits from that too. Retail prices also include taxes and duties, and the government which is facing a financial crisis of its own, has been increasing them. In early April, excise duty on fuel saw its steepest ever hike in eight years at ₹3 per litre on petrol and diesel.
Ideally, Indian state owned fuel retailers revise prices at 6 am daily under the dynamic pricing at all petrol pumps. This is done to set the fuel prices considering trade parity pricing, which is determined by the prevailing prices of these products in the international market. It is to be noted that they are compared to finished products like petrol and diesel and not crude, which is not the chosen benchmark.
Indian fuel prices are linked to cracks
A “crack” is an industry term that refers to the cost of breaking apart crude oil into different component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease.
The Indian retail fuel prices are linked to the price of these cracks in the global markets and not to that of crude oil per se. The demand and the supply situation of finished cracks in the global markets may have some effect on the consumer price of auto fuel in India.
AdvertisementAlthough, the crude oil, which is responsible for 90% of the cost of these refinery cracks, is the biggest determinant of consumer fuel prices in India.
The cost of crude oil in the Indian basket averaged around $47.56 and $56.43 per barrel in 2016-17 and 2017-18. It also registered an average of $54.563 in February and stood at $33.36 in March.
SEE ALSO: Traders piled $1.6 billion into an oil ETF last week — right before prices went negative for the first time in history
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