Fuel Price Hike: Why petrol and diesel prices were hiked today after a 4.5 month hiatus | India Business News

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After a hike of Rs 25 per litre in diesel prices for bulk buyers, the government on Tuesday raised petrol and diesel prices by 80 paise a litre each, while domestic cooking gas (LPG) prices were increased by Rs 50 per cylinder, after a freeze of 137 days. Retail prices of petrol and diesel had been unchanged since October 2021 when crude oil prices were hovering around $80 a barrel.
A litre of petrol in Delhi will now cost Rs 96.21 and diesel will be sold at Rs 87.47 per litre. A 14.2-kg non-subsidised LPG cylinder will now cost Rs 949.50 in the national capital. The cooking gas costs were last revised in October.
The prices at the pump rose for the first time since November 4 when the central government cut excise duty and several states followed suit with a reduction in value-added tax to ease the burden on consumers.
Global crude prices, have however, surged to the highest in nearly a decade as Russia‘s invasion into Ukraine threatens to curb supply.
The latest price increase means consumers will pay less than 1% more at the pump for now.
“The fuel price hike, the first since November 2021 remains low compared to the run up in crude oil prices. This indicates that the full impact of the crude oil price increase would be passed on to the retail consumers in a graded manner,” said Prashant Vasisht, Vice President and Co-Head, Corporate Ratings, ICRA.
Why have oil prices been rising globally but not in India?
Oil prices have been on the boil ever since Russia put its forces on the Ukraine border in February. They spiked after it invaded the central Asian nation on fears that oil and gas supplies from energy giant Russia could be disrupted by the conflict in Ukraine or retaliatory western sanctions. Russia makes up for a third of Europe’s natural gas and about 10 per cent of global oil production. About one-third of Russian gas supplies to Europe usually travel through pipelines crossing Ukraine.
But for India, Russian supplies account for a tiny percentage. While India imported 43,400 barrels per day of oil from Russia in 2021 (about 1 per cent of overall its imports), coal imports from Russia at 1.8 million tonnes in 2021 made up for 1.3 per cent of all coal imports. India also buys 2.5 million tonnes of LNG a year from Gazprom of Russia.
While supplies seem to be of little worry for India, it is the prices that are a cause of concern
Domestic fuel prices are directly linked to international oil prices as India imports 85 per cent of its oil needs – but they had not been revised up until now.
Why have the prices increased only now?
Rates are supposed to be revised on a daily basis, but state-owned fuel retailers froze rates when the campaigning for election to five states started despite the cost of raw material spiralling. International oil prices were around $81-82 a barrel in early November as against $114 now. The freeze continued till the end of the state elections in Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur earlier this month.
“Fuel prices have been hiked after a long time even though the crude prices have increased tremendously. The prices hike can add more to the already high inflation. The consumption demand has decreased because of the high inflation. Government has been very cautious recently in increasing the prices as they realize that inflation can reduce the demand further, which can hurt the economic recovery of India,” said Likhita Chepa, Senior Research Analyst at CapitalVia Global Research.
What is the pattern?
Petrol and diesel prices have been frozen in the past before crucial elections. There was a 19-day price freeze ahead of Karnataka polls in May 2018, despite international fuel prices going up by nearly $5 per barrel. The moment the polls were over, oil companies raised prices for 16-straight days. Petrol price climbed by Rs 3.8 per litre and diesel by Rs 3.38 per litre.
Fuel prices froze between January 16, 2017, and April 1, 2017, when assembly elections in five states — Punjab, Goa, Uttarakhand, Uttar Pradesh, and Manipur — were held and then again for 14 days ahead of the assembly elections in Gujarat in December 2017.
Similarly, oil prices began to rise a day after the final phase of polling for the 2019 Lok Sabha elections ended.
Several analysts had expected an increase in fuel prices after the last phase of polling
The government was unlikely to cut fuel taxes to soften the blow, at least before the March 31 end of the fiscal year, considering the impact of that on state revenues.
Contrary to the market expectations, Oil marketing companies had not hiked retail prices of petrol, diesel and LPG post the 5 state elections, despite double digit negative petrol / diesel margins up until now. “We believe the OMCs are waiting for crude volatility to settle to arrive at a comprehensive response along with the Government (price hike + possible excise and / or VAT cut!), depending on where crude settles. Despite the high marketing losses, QTD average margin is Rs 1.7/ltr (likely to be Rs-0.3/ltr for the full quarter) and LPG under recovery is about Rs75bn. OMCs have the luxury of waiting for crude volatility to settle, thanks to high Singapore refining margins of over US$ 7.0/bbl (QTD) and likely huge inventory gains estimated at Rs 223bn, if crude prices sustain,” said Antique Stock Broking in a report.
What determines fuel rates in India?
Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel according to changes in the international market. Other factors such as exchange rate, tax structure, inland freight and additional costs, dealers also play a role in deciding the price.T he Centre taxes Rs 32.9 per litre on petrol and Rs 31.8 per litre on diesel, constituting 31 per cent and 34 per cent of the current retail prices of petrol and diesel, respectively.
The value-added tax imposed by states also determines the rates.
But will crude prices continue to remain high?
According to a research report by SBI, historical trends (since 2018) indicate that it takes around 18 months for crude prices to crash by as much 67% from the highest level and 30% drop from highest level could even come in less than 3 months. Meanwhile, the average price of Indian basket of crude oil has risen to $84.67/bbl in Jan’22 from $63.4/bbl in Apr’21, 33.5% increase. According to SBI’s calculations, every $10/ bbl increase in Brent crude price will lead to an increase in inflation by 20-25 bps.
“Interestingly, petrol and diesel prices have not changed since Nov’21. Based on the existing VAT structure and taking Brent crude price of $95/bbl.-$110 bbl., diesel and petrol prices should have been higher by Rs 7-14,” noted SBI.
Inflation concerns:
Economists said a 10% rise in pump prices is likely to push retail inflation by 50-60 basis points through direct and second-order effects, prompting consumers to cut spending on durables and luxury products.
Retail inflation rose a seven-month high of 6.01% year-on-year in January, crossing the upper limit of the Reserve Bank of India’s (RBI) tolerance band, pushed by rising fuel and manufacturing prices.
“Retail fuel prices of petrol and diesel have been kept unchanged since November 2021, whereas global crude oil prices rose by close to $30 per barrel during this period. The pass-through of rising crude oil prices to domestic fuel prices is, therefore, inevitable, and further hikes can also be expected,” said Dipti Deshpande, Principal Economist, CRISIL.
Crisil’s base-case forecast for consumer price inflation, at 5.4% average for fiscal 2023, bakes this in. The forecast also assumes brent crude prices at an average $85-90 per barrel in fiscal 2023.
‘While lower excise duty relative to last year will help moderate the impact of rising international crude oil prices, it will not be sufficient to lower fuel inflation if Brent prices stay above $90 per barrel throughout next fiscal. In that case, the government may need to cut excise duties further to alleviate the burden on consumers,” added Deshpande.
How much are fuel prices expected to rise?
Oil marketing companies have hiked the prices of petrol and diesel after a gap of over four months since the price of brent is now up 45% to $118.5 per barrel from $81.6 barrel when OMCs last revised fuel prices.
These companies are currently earning negative margins of Rs 12/ltr and Rs 9.5/ltr on sale of diesel and petrol respectively but is likely to improve to a negative margin of Rs 6/ltr by the end of next fortnight as prices have come off the peak.
“Required retail price hike would be Rs 12/ ltr (assuming no excise duty cut) earn gross margins of Rs 4.1/ltr, which is FY21 average,” noted Antique Broking.
With international oil prices – on which domestic fuel retails are directly benchmarked – spiking in the last two months, state-owned fuel retailers “need a massive price hike of Rs 12.1 per litre on or before March 16, 2022, just to breakeven and a price hike of Rs 15.1 is required” after including margins for oil firms, ICICI Securities said in a report. Even state oil companies have told the government that they need a price increase of Rs 10-12 per litre for petrol and diesel, a second official said.
Experts expect the price hike to continue in the coming days as crude prices have increased significantly of late. Brent had touched $139.13 per barrel, the highest since 2008, on March 7.
Jet fuel prices up by 18%, bulk diesel costlier by Rs 25 per litre
Last week, oil marketing companies raised jet fuel prices by a steep 18%, while price of diesel purchased by bulk industrial buyers directly from the oil marketing companies have increased by Rs 25 per litre.
Bulk buyers are those entities that directly source oil tankers from OMCs such as factories, airports, bus fleets, transport fleets, malls, railways etc.
The wide difference of Rs 25 per litre between the bulk user rate and petrol pump price prompted bulk users to refuel at petrol pumps rather than book tankers directly from oil companies, which led to widening losses of oil companies, who were already bleeding from selling petrol and diesel at way below the cost.
“There is a massive surge of demand at fuel stations (retail outlets) due to increased delta of around Rs 25 per litre between retail and industrial price of diesel, leading to heavy diversion of bulk HSD (direct customers) to retail outlets. There is also a very heavy lifting of fuel by dealers and both B2B and B2C customers, who have advanced their purchases, to top up their tanks and capacities in anticipation of price increase which is overdue,” Reliance Industries said in a statement.
Reliance, operator of the world’s biggest refining complex at Jamanagar, supplies some fuels to state-run refiners and also taps the retail market directly through sales at RBML’s fuel stations.
With inputs from Agencies



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