The Middle East conflict is once again shaking global oil markets, and its impact is being felt far beyond the region. As tensions are increasing, crude oil prices are increasing and pressure is also increasing in India. The government now faces a tough choice: protect consumers from high fuel prices or help state-owned oil companies grappling with mounting losses. Crude oil prices climbed above $126 a barrel on Thursday after US President Donald Trump signaled a continued naval blockade of Iran, raising concerns over continued disruption in the Strait of Hormuz and worsening global supply pressures. The hike has significantly increased losses at state-owned oil marketing companies (OMCs), which are already under stress from the impact of the Gulf War on energy markets. These companies are seeking immediate permission to raise pump prices and pass on higher global costs to consumers, according to people familiar with the matter cited by ET. Their losses are increasing in petrol, diesel, aviation turbine fuel (ATF) and LPG. Still, despite the financial pressure on OMCs, the government is not expected to approve the hike immediately. One person said the delay is partly due to speculation linking the drop in fuel prices to the recently concluded elections. “International prices are volatile and have increased rapidly, but the government’s effort is to ensure that consumers face minimal problems, so our prices are stable,” Sujata Sharma, joint secretary in the ministry of petroleum and natural gas, said on Thursday. “The impact (on oil marketing companies) will be known with time.” Earlier this week, Sharma had also rejected reports of increase in fuel prices from May 1. People aware of the ongoing discussions said the current situation may not be sustainable in the long run, adding that OMCs may eventually demand compensation from the government if retail prices remain unchanged.
Consumer relief and OMC pressure
The Center is already dealing with the extension of subsidy commitments on LPG and fertilisers, making it reluctant to absorb further lower realizations on petrol and diesel due to the potential impact on government finances. Allowing fuel prices to rise would improve OMCs’ balance sheets, but such a move risks increasing inflation and depressing economic growth. The scale of the global energy shock has been severe. Compared to February levels, average diesel prices in April increased by 119%, petrol increased by 69%, LPG increased by more than 40%, and ATF prices doubled. Brent crude, which was at around $73 a barrel before the war began on February 28, has now risen dramatically. The June Brent contract surpassed $126 ahead of expiration on Thursday, while July futures traded near $114. This is one of the rare occasions when Brent’s monthly average has crossed $120 a barrel, a level seen only six times before, including after the 2008 global financial crisis and the outbreak of the Ukraine war in June 2022. Domestically, oil companies have so far avoided broad-based retail fuel hikes by adjusting prices selectively. Premium petrol, bulk diesel and ATF for international aviation have increased sharply in line with global prices. However, regular petrol and diesel prices have remained stable at filling stations, domestic ATF has seen only a partial increase, and LPG prices have increased by only Rs 50 per cylinder. In the initial phase of the price rise due to the war, there was an expectation that OMCs would be able to manage losses using the profits made during the previous years of low crude oil prices and high retail margins. But with the Gulf crisis showing no signs of abating anytime soon, those buffers are shrinking, and discussions are moving toward the possibility that a rise in pump prices may be inevitable.
