Demystifying increasing prices of Petrol and Diesel in India during Covid19 period: After 67 days of lockdown, the economy finally opened up on June 1st. Since then most of us have been trying to bring our lives together and adapt to the new normal of living with COVID-19. In the midst of threats on our borders and the steady rise of corona cases, petrol and diesel prices have steadily increased in the background for 22 days. These added to the unusual events of 2020, as the diesel prices were higher than petrol.
Today we shed light on the rising petrol and diesel prices. We also try and answer the possible reason for the increase especially when just a few days ago the crude oil prices crashed into the negative territory.
How are petrol and diesel Priced?
Before we look into the causes for the price increase, it is best to figure out the chain that crude oil moves through in order to better understand where the price increase has come from.
Unlike other oil-rich countries, 80% of the crude oil consumed in India is sourced from other countries. This crude oil faces freight charges until it is transported to Oil Marketing Companies (OMC) which is dominated by public sector enterprises with very few private players. These companies go on to refine the crude oil into finished products. The public players include IOCL, HPCL, BPCL, MRPL, etc. The ONC companies then charge their cut of profits in addition to the cost incurred by them for refining. The next cut is taken as profits to the dealers in petrol pumps etc. It may be surprising but the portion of the charges mentioned above make up only one-third of the amount paid by the consumers for petrol or diesel.
The remaining two-thirds portion is made up of the taxes paid to the government. These taxes are levied in the form of excise duty, VAT and Cess charges. The excise duties are charged by the central government whereas VAT and Cess charged on petroleum are charged by the state governments.
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Every Rupee that the government increases in taxes on diesel and petrol leads to Rs.14,000 crore of additional revenue to the government per annum. This sheds light as to why the government would target the petrol and diesel prices. In the current scenario, the additional revenues likely to be generated come up to 1.4-1.7 lakh crore rupees.
Reasons for the increase in prices of Petrol and Diesel
— Crude oil price normalizing
One of the major questions we would be having is that since the prices had gone negative, how is it that we are facing an all-time biggest increase in a fortnight. It is important to note that there exist different types of crude oil varying based on the place they are sourced from and the sulfur content present in them. WTI from the US, Brent crude from the UK, and the OPEC basket from the middle east. Of these the most expensive has been the Brent and the OPEC.
Unfortunately for us, these are the ones that India imports. And further depressing news has been that it was WTI crude that went negative and not the Brent and OPEC. At their lowest points in April, the Brent and OPEC were priced at $16 to $20 per barrel.
These prices have since then been doubled crossing $40. The Brent and OPEC crossing $40 in recent times have been one of the reasons for the price increase. But this is not a major factor as these prices simply haven’t even touched pre-COVID levels of 2019.
— Setting off losses
As seen above despite Brent and OPEC being comparatively expensive, their global prices had reduced significantly in the months of April-May. This further raises questions as to why the prices of petrol and diesel were not reduced to match the global fall. The answer to these questions lies in the fact that the govt had chosen not to transfer the benefits to the consumers but instead use it to set off other losses.
These losses were primarily because of the COVID-19 environment. It had forced the government to move into a lockdown freezing most of the revenue channels for the govt. Which also included income from petrol and diesel as the consumption was dropped to only 30%.
Union petroleum minister – Dharmendra Pradhan
In this case, the government decided not to reduce the prices to match the crude oil price. But instead, they chose to maintain price levels to make up for the fall in demand for petrol and diesel and also fall in revenue from other sectors. This carried on till the lockdown was lifted at which point the crude oil prices kept increasing globally.
The fall in demand to only 30% of consumption also caused the OMCs to sell every liter at a loss as the profit made was not able to cover the cost incurred. The OMCs were forced to further increase their margins in the’ Lockdown-Unlock’ period to cover the losses they operated on during the lockdown which led to a 22-day steady increase till the prices touched levels where they were profitable.
— INR to Dollar exchange rate
The exchange rates also impact the prices of petrol and dollar as the crude oil is traded only in exchange for the dollar. The COVID-19 pandemic hammered the already weakened rupee. The rupee currently hovers at over Rs. 75 for a dollar. The rupee traded at Rs.70 for one dollar in December 2019.
The increase in the prices of petrol and diesel-only would kick off the inflation domino effect on other products as well. The Jet Fuel too has already begun to see its share of the inflation. And we already know that ATF being the major expenses for an airline company will further be transferred to the consumer fares. Other products too face inflation in prices as the cost of freight and transportation would increase too. The already ailing Automobile industry has already started to feel the burn as the Demand for diesel vehicles has already dampened.
Needless to say, the diesel and petrol price increase is not welcome considering the state of the economy where the people are already facing job losses, pay cuts, and fear public transport in COVID-19 times
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.