Here’s why fuel prices in India may not come down in a big way ⁠— at least not this year

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Here’s why fuel prices in India may not come down in a big way ⁠— at least not this year
  • The price of petrol and diesel in India hit a new high on June 4, with petrol pumps in Mumbai charging ₹101 per litre.
  • There are at least five factors that determine the final retail price of fuel, petrol or diesel.
  • Last week, the price of Brent crude was at its highest levels since May 2019 crossing the $71 per barrel mark.
Fuel prices hit another all-time high on June 7 with petrol in Delhi costing ₹94.46 per litre and in Mumbai costing ₹101 per litre. The retail price of how much it costs to fuel your car has jumped by 4% in the past one month.


While many are hoping that this is just a temporary surge, petrol is unlikely to get cheaper, by any significant amount, this year.


The net effect of the rise in fuel prices ⁠— or if they remain high for too long ⁠— is bad for the economy because the ripple effect can make other things expensive. Which is why, the Reserve Bank of India (RBI) governor, Shaktikanta Das, reiterated his request for a reduction in taxes and duties on fuel to keep inflation under control during the bio-monthly monetary policy update on June 4.


There are at least five factors that determine the final retail price of fuel, petrol or diesel. These include the price of the key raw material, crude oil, the exchange rate for the US dollar against the rupee, the cost of refining, government taxes and the level of consumer demand.


Here’s why the spike in fuel prices — whether its diesel or petrol — may be here to stay:

Global crude oil prices are likely to remain high this year

Global crude oil prices are likely to remain high this year
BCCL

Last week, the price of Brent crude was at its highest levels since May 2019 crossing the $71 per barrel mark. The US Energy Information Administration (EIA) expects Brent crude oil prices to average at $62.26 per barrel this year. This is nearly one and a half times the average price for last year.

The World Bank has pegged its estimate at $56 per barrel in 2021 while the International Monetary Fund’s (IMF) prediction is $59.74. However, these are the average prices accounting for all the highs and lows. US’ leading investment bank Goldman Sachs expects Brent prices to hit $80 per barrel over the next six months before starting to come down.

If the unrest in the Middle East escalates or if the new Iran nuclear deal further stalls supply, the price of crude oil could go up further.

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Even if oil doesn’t get more expensive, a stronger dollar could inflate prices for India

Even if oil doesn’t get more expensive, a stronger dollar could inflate prices for India
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Oil is purchased in dollars. India pays in rupees. A stronger dollar means India will have to pay more for the same amount of oil even if the price doesn’t change in the international market.

A stronger dollar means it gets more expensive to pay for oil in rupees, even if the overall price of oil may be falling. Global ratings firm Fitch forecasts that the Indian rupee will average at ₹75.50 to a dollar in 2021 — that’s ₹3 higher than the price level of ₹72.8 observed on June 4. The average rupee/dollar exchange rate was ₹74.13 in 2020.

So, higher the value of the dollar, the more the importers have to pay for crude oil (or for any commodity for that matter).

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Government taxes on petrol and diesel may not come down in a hurry

Government taxes on petrol and diesel may not come down in a hurry
Insider

Out of the ₹100 you’re paying per litre of petrol, nearly ₹60 is going to either the central or state government.

Petrol and diesel are two of the highest taxed commodities in the country, and they don't fall under the umbrella of the Goods and Services Tax (GST). In the six years of the Modi administration, tax collection on petrol and diesel has jumped over 300%.

Finance Minister Nirmala Sitharaman told news agency PTI that the GST Council may consider adding fuel to the roster in March. However, that would imply a rate in excess of 100% to retain the same returns. And, right now, the GST slabs are 5%, 12%, 18% and 28% — nowhere close to what the government is able to earn under the current system.

And, in the aftermath of the COVID-19 pandemic, it is unlikely that cash-strapped governments, both state and centre, would want to let go of the precious tax income that they make out of it.

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Refining cost may not be a problem

Refining cost may not be a problem
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India may not produce enough crude oil to meet its needs but it has more than enough refining capacity. Therefore, the cost of refining may not go up significantly in the immediate future.

Moreover, India plans to double its oil refining capacity from the current 250 million tonnes a year in the next decade. The products that are derived out of refining crude oil are a big contributor to India’s export income.

The reopening of the economy, after the pandemic-induced lockdown, has brought the demand for fuel back on track.

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The demand for fuel is likely to rise as the economy opens up

The demand for fuel is likely to rise as the economy opens up
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The Organisation of Petroleum Exporting Countries (OPEC) has agreed to open up the supply of oil, but demand is likely to surge in step as economic activity gets restored.

“We expect the biggest jump in oil demand ever, a 5.2 million barrels per day (bpd) rise over the next six months,” said the bank in its report, citing acceleration of vaccinations in Europe and an unleashing of pent-up travel demand as summer kicks in.

As per oil ministry's Petroleum Planning and Analysis Cell (PPAC) India consumed 194.63 million tonnes of petroleum products in 2020-21 as compared with 214.12 million tonnes demand in the previous year.

The government imposed a nationwide lockdown due to the pandemic, which caused the fuel consumption to contract for the first time since 1998-99. However, as the lockdown got lifted and industrial activity resumed, fuel consumption was seen rising again and the demand is expected to rise nearly 10% in the fiscal year beginning April 1.

“We expect the biggest jump in oil demand ever, a 5.2 million barrels per day (bpd) rise over the next six months,” said the bank in its report, citing acceleration of vaccinations in Europe and an unleashing of pent-up travel demand as summer kicks in.

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