Global crude prices have crashed, but petrol and diesel prices have not; heres why

Global crude prices have crashed, but petrol and diesel prices have not; heres why

The outbreak of Novel Coronavirus has started a price war between major oil-producing countries and have resulted in a dramatic fall in prices of crude oil

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The outbreak of Novel Coronavirus that has spooked global markets in addition to a price war between major oil producing countries such as Saudi Arabia, Iran and Russia have resulted in a dramatic fall in prices of crude oil.

Brent crude prices have more than halved in this new decade so far sliding from nearly $64 per barrel at the start of the year to around $31.13 per barrel. Last Monday saw the biggest intra-day fall in crude prices since the gulf war of 1991 when it declined over 31 per cent. The fall in prices of the Indian basket, which is the benchmark on the basis of which retail prices of the fuel are determined in the country, also fell dramatically. From a monthly average of nearly $66 per barrel in December 2019,  prices are down at $34.70 on March 11, a fall of over 47 per cent.  

The reduction in retail prices of petrol and diesel at the pump, has not been commensurate to this. On the last day of December 2019, a litre of petrol in Delhi cost Rs 75.14 which has now come down to Rs 70.29, a fall of just 6.5 per cent. In the case of diesel, prices have softened from Rs 67.96 to Rs 63.01, down 7.3 per cent. The gap is substantial.

If one were to compare the last time crude prices were this benign and look at how much consumers were paying for petrol and diesel then, one needs to go back to December 2015 when for the month as a whole crude prices hovered at around $35.68 per barrel. Retail prices of petrol then were at Rs 59.98 per litre, nearly 15 per cent lower than today's prices. Prices of diesel were Rs 46.09 per litre, almost 27 per cent lower than today. Further back in June 2004, crude prices were at a similar $34.22 per barrel but we were paying just Rs 35.71 per litre for petrol and Rs 22.74 for diesel. Those were different times then when prices of fuel were regulated and subsidised. Unlike today, governments lost money on selling petrol and diesel and not profited from it.

For a country that imports more than 83 per cent of its crude requirement and pays more than $100 billion for it every year, softer crude prices should be good news. While it indeed is for the national exchequer, as the instances cited above indicate, it has not been the case for consumers at large. So what is getting lost in translation and why are consumers not getting the full benefit of low crude prices? There are two major reasons for that - foreign exchange rates and taxes on crude oil.

In December 2015, one would have paid Rs 64.8 for every dollar which due to the slowdown in global economy and flight of capital from India has depreciated to Rs 73.81. That is a sharp 14 per cent increase. This means in rupee terms, India is paying much more for a dollar and as payments for barrels of oil are made in dollar equivalents, it dilutes the benefit of lower crude prices.

The other big reason is higher taxes on oil. Almost half the price of petrol today is accounted for by taxes - Rs 19.98 on excise, and Rs 15.25 in VAT. Add dealer commission of Rs 3.55 and it adds up to nearly Rs 39 per litre. For diesel this figure (VAT+excise+dealer commission) stands at nearly Rs 28.

In fact, in its first term between 2014 and 2019, the government has exploited low oil prices multiple times increasing excise duties a record nine times between November 2014 and January 2016.  As a result  duty on petrol went up by Rs 11.77 a litre and on diesel by 13.47 a litre. Duty cuts have also happened but only twice. In October 2017, when crude prices were benign at under $50 per barrel, duties were reduced by Rs 2 per litre. Exactly a year later in October 2018, crude prices started inching upwards and breached the $80 mark for the first time in four years. This led to a steep increase in retail prices of petrol and diesel which hit all time highs of Rs 84 on October 4 (petrol) and Rs 75.69 on October 16 (diesel). To soften the blow, the government reduced  excise duties again by Rs 1.5 per litre while oil marketing companies were asked to absorb another Rs 1 per litre bringing down retail prices by Rs 2.5 per litre.

Part of that reduction was, however, reversed in the first budget of this government last July, when a Rs 2 per litre cess was imposed on petrol and diesel.

While the benefit of the lower crude prices this time around to consumers has been partial so far, an oil marketing company official said more cuts could be in the offing. Oil prices are revised on a daily basis and any reduction often takes place with a lag. There are also expectations of another round of excise duty cuts given the fact that crude prices are expected to remain subdued for much of next fiscal 2020-21.

"The international crude oil prices have declined significantly from $63.27 per barrel as on January 6, 2020 to $31.13 per barrel as on March 9, 2020, while petrol prices in India (Delhi) decreased from Rs 75.69 to Rs 70.59 during the same period. However, significant 50 per cent fall in the international crude oil prices has only resulted by a 7 per cent decline in the domestic petrol prices," says D K Aggarwal, president, PHD Chamber of Commerce and Industry. "At this juncture, we suggest a reduction in excise duties and VAT on petroleum, diesel and allied products by at least 25 percent, to bring down the prices of petroleum products, which will be a big relief to the industry, will boost and kick start economic growth, while reviving the spirit in the economy. This reduction in excise and VAT would reduce the prices of petrol and diesel by Rs 9-10 per litre and help lower inflation, boost consumer spending, make Indian industry competitive and boost overall revenue benefiting the government, industry and economy."

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