Why Crude Oil Price Crash Hasn’t Made Petrol, Diesel Cheaper For Indians
When crude oil is tumbling to record lows every day, Indians haven’t seen that reflect in petrol and diesel prices at the fuel station. The reasons are familiar: increase in taxes by the government to shore up its revenue and higher marketing margins of state-run oil retailers to make up for losses.
The May contract of the West Texas Intermediate, the benchmark for the U.S. oil industry, plunged below zero to minus $37.63 a barrel as the coronavirus outbreak dried up demand and there’s no room left to store unused oil. Meaning, traders not wanting the physical delivery were willing to pay buyers to take it off their hands.
For Asia though, the benchmark is Brent crude. And it fell below $20 per barrel—its lowest point since February 2002. That’s because the global economic uncertainty and price war between Saudi Arabia and Russia caused a global glut. And even the output cuts brokered by the U.S. failed to lift the crude.
Brent has plunged 66 percent so far this year. According to data compiled from Indian Oil Corporation Ltd.’s website, retail petrol and diesel prices in India fell by only 7 and 8 percent, respectively, during the period.
And fuel prices at the pump, though deregulated in India, have remained unchanged for more than a month as the lockdown has brought travel to a halt.
Two factors contribute to the gap between prevailing crude oil prices and what the consumers pay at filling stations in India: the rupee movement and 15-day average prices.
The Indian rupee has depreciated nearly 7.6 percent against the U.S. dollar this year—in part wiping off gains that could made auto fuels cheaper.
Also, oil marketing companies revise petrol and diesel prices daily based on average crude oil price in the previous 15 days. So today’s price reflects at the pump after 15 days.
Even after factoring in the weaker rupee and the time lag, Brent is down 53 percent this year. Yet, prices of petrol and diesel haven’t fallen as much—not even close.
Consumers didn’t get relief because the central and state taxes account for a chunk of the fuel price.
For example, in Delhi as on April 16, the state’s share was 21.3 percent and the central government took 33 percent of what a consumer paid for every litre of petrol. The breakup for diesel was 14.8 percent for the state and 30.2 for the centre.
Moreover, as crude prices were falling, the central government increased excise duty by Rs 3 each on every litre of petrol and diesel. That’s the biggest jump in four years.
Oil marketing companies also increased gross marketing margins, or mark-up on sale of every litre of petrol and diesel. Higher margins will help fuel retailers recoup losses due to lower fuel demand, weak refining margins and one-time inventory loss caused when market prices fall.