After today’s increase, petrol is now being sold at Rs 97.7 per liter in Delhi. (AI image)
Petrol and diesel prices have been on the rise for the past few weeks, and so today’s hike of Rs 3 per liter comes as no surprise. This is especially true as there appears to be no quick resolution to the US-Iran conflict and persistently high global crude prices are pushing up the oil import bill. Since the start of the war in late February, India had become one of the few countries not to raise petrol and diesel prices in the wake of the oil supply shock that sent shock waves globally.India has kept its petrol and diesel prices unchanged for four years following the Russia-Ukraine conflict. But rising global oil prices beyond $100 per barrel have made the mathematics untenable for oil marketing companies.After today’s increase, petrol is now being sold at Rs 97.7 per liter in Delhi. The rates for Mumbai, Kolkata and Chennai are Rs 106.68, Rs 108.74 and Rs 103.67 respectively. Diesel price in Delhi is Rs 90.67, while in Mumbai, Kolkata and Chennai its price is Rs 93.14, Rs 95.13 and Rs 95.25 respectively. Rates vary across cities depending on state level taxes – value added taxes. Petrol and diesel do not come under GST so the tax rates are not uniform across the country.Why was the increase in petrol and diesel prices inevitable? How much loss are the oil marketing companies incurring? And more importantly, will petrol and diesel prices increase further in the coming days?
Why did the prices of petrol and diesel increase?
US-Israel-Iran war started two months ago – yet India didn’t raise fuel prices. So, what compelled the government to allow state-run oil marketing companies (OMCs) to raise rates?Several statements last week pointed towards a correction in oil prices – Prime Minister Narendra Modi called for austerity measures to cut fuel consumption to save forex reserves, Oil Minister Hardeep Singh Puri pointed to rising losses of OMCs, and RBI Governor Sanjay Malhotra said consumers would eventually face higher prices if the oil supply and price shock continues.
Today’s rise has come from state-run OMCs – Indian Oil, Bharat Petroleum and Hindustan Petroleum. Private fuel retailers like Naira, Shell have already increased prices in March. In March itself, the price of domestic cooking gas LPG was increased by Rs 60 per cylinder. Crude oil prices have started skyrocketing due to disruption in oil supply due to the closure of the Strait of Hormuz. Global crude oil prices rose from $70–72 per barrel before the Middle East conflict to above $120 at one point. They are now hovering in the $104-110 range, just above $100 a barrel.The basket of crude oil that India imports is averaging around $113-114 a barrel, up from $69 in February.Crude oil is the raw material that is required to be refined into petrol and diesel. The huge surge in oil prices means that oil retailers are paying too much to purchase oil. Due to no change in retail prices earlier, OMCs were incurring huge losses.So, if losses increased at the beginning of the war, why were prices not revised immediately? Apart from possible political reasons related to state elections, the first step to block the amendment was the government’s move to cut excise duty on petrol and diesel.On March 27, to provide relief to consumers from rising global crude oil prices, the government cut excise duty on petrol and diesel by Rs 10 per litre. This meant a blow to the tax revenue on the government exchequer.
Despite this, according to estimates, before the decision to increase rates on Friday, oil companies were making a loss of Rs 14 per liter on petrol and Rs 42 per liter on diesel.Earlier this week, Oil Minister Hardeep Singh Puri had said that the three state-run fuel retailers were losing around Rs 1,000 crore per day in their attempt to keep petrol and diesel prices unchanged. ,He said the cumulative losses in one quarter for OMCs were enough to wipe out all the profits made by the companies in the entire year. He estimated the loss to be around Rs 1 lakh crore.
Petrol, diesel prices: Is this the first hike?
According to a PTI report, industry sources said the price hike appears to be measured – enough to partially ease margin pressure on oil companies without causing a major inflationary shock.Experts and economists also believe that this hike could be the beginning of a gradual increase in the rates of petrol and diesel. This means that petrol and diesel prices may continue to rise in the coming days, especially if the Middle East crisis is not resolved and global crude oil prices remain above $100 per barrel.
Radhika Rao, executive director and senior economist of DBS Bank, said that based on historical data, there may be a possibility of further increase.“In 2022, the increase in pump prices was orderly. This time, given the sharp rally in global crude prices and limited signs of an imminent end to the conflict, we may see one or two additional modest increases, taking the cumulative increase to around 10%,” she tells TOI.Madan Sabnavis, chief economist, Bank of Baroda, also agrees that the current increase of Rs 3 per liter in diesel and petrol prices is a start to offset the losses incurred by OMCs. Sabnavis explains, “This may not be the only hike, and in the coming days we can expect more depending on the emerging circumstances. Smaller hikes have a better impact on consumer sentiments.”“Also, OMCs can keep an eye on global developments and price movements before making subsequent hikes as they have an impact on inflation which will in turn influence policy decisions,” he added.The key to further price increases lies in the duration of the US-Iran conflict, the closure of the Strait of Hormuz and the broader trend of crude oil prices globally.Ranen Banerjee, partner and leader, economic advisory services, PwC India, sees today’s increase as a partial cost burden. “Future action will depend on how long the conflict continues and the trend of crude oil prices. If it remains at current levels, further increases may occur,” he says.“If global crude oil and LPG prices remain high for a long time, the government will have to increase the prices of petrol and diesel along with providing some support to OMCs on LPG,” L&T group chief economist Sachchidanand Shukla told TOI.He further said, “The price hike of Rs 3 per liter is a gradual response to the almost 3-month-old West Asia crisis. This will provide some relief to OMCs, which are incurring gross marketing margin losses of Rs 15-20 per liter on the sale of petrol and diesel.”According to a PTI report, the increase of Rs 3 per liter is about one-tenth of the increase required to compensate OMCs for the loss caused by higher crude oil prices. Importantly, the government has already tried to absorb some part of the higher crude oil price by cutting excise duty. Obviously, this has proven insufficient to counter the impact of crude oil rising above $100.The bottom line is this: if this trend continues, it is only a matter of time before retail prices of petrol and diesel are raised again.
