Petrol, diesel price hike. Customers did not get benefit of low prices, but are now paying the cost of rising oil prices

The economy is gradually opening up in Unlock 1 and so are petrol and diesel prices. After a hiatus of more than 80 days since March 16, the public sector oil marketing companies (OMCs) — Indian Oil, HPCL and BPCL — have restarted the daily pricing mechanism on petrol and diesel from June 7. In just three days, the prices of the fuels have risen by more than ₹1.7 a litre. At Indian Oil’s petrol pumps in Delhi, petrol cost ₹73 a litre on June 9, up from ₹71.26 a litre on June 6. A litre of diesel cost ₹71.17 on June 9, up from ₹69.39 on June 6.

Oil climb

There are a few reasons for this jump in petrol and diesel prices. One, global oil prices, after having been hammered down in March and April due to demand crash and oversupply, have recouped quite a bit of their losses. The benchmark Brent and the Indian crude oil basket are now about $40 a barrel, double their April low of about $20 a barrel. Demand for oil is looking up due to easing of lockdowns in various parts of the world. This, combined with the OPEC+ supply cuts, has provided support to oil prices. The OPEC+ group, in its meeting last weekend, decided to continue with its record supply cut of 9.7 million barrels a day for one more month (until July end); the cuts could taper thereafter.

Tax burden

Still, Brent is below the levels seen in end-February (about $50 a barrel); yet petrol and diesel prices are higher than what they were then. That’s primarily because, over the past three months, the Centre and many States increased duties and taxes on the fuels that took away the gains and did not allow pass-through of lower prices to customers. A cash-strapped Centre had raised the duty on petrol and diesel twice —first by ₹3 a litre on March 14, and then again on May 5 by ₹10 a litre on petrol and by ₹13 a litre on diesel. Many States too increased sales tax/VAT on these fuels. Delhi, for instance, increased the VAT on petrol from 27 per cent to 30 per cent and that on diesel from 16.75 per cent to 30 per cent effective May 5.

Thankfully, unlike the VAT increase by the States, the sharp increase in excise duty by the Centre did not immediately result in a spike in the prices of petrol and diesel. That’s because the daily pricing mechanism was on hold from March 16 to June 6, and the excise duty hike was adjusted against the marketing margins of the OMCs.

But now, with the daily pricing mechanism back in force, the OMCs are increasing petrol and diesel prices in tandem with the rise in global petro-product prices. So, customers did not get the benefit of low crude oil prices, but are now paying the cost of rising crude oil prices. The script seems similar to what happened between 2014 and 2018; the Centre and many States aggressively raised taxes on petrol and diesel between 2014 and 2016 to take advantage of low oil prices, but did not cut taxes with the same alacrity in 2017 and 2018 when oil prices were rising; as a result, customers were not given meaningful benefit. Petro-taxes are a major cash cow for the Centre and the States, and once these go up, they seldom come down meaningfully. This could be especially true in the current troubled times when the exchequer has taken a big hit due to the lockdowns.

More to come?

Research house Credit Suisse says that in the context of increasing crude prices, the OMCs may have to take more price increases on petrol and diesel to avoid making losses in their marketing segments. It says that the OMCs need to increase price significantly from the current levels to make margins close to historic averages. It expects the OMCs to continue to increase prices gradually until June 16.