Tussle Of Petrol Prices Amidst Crude Oil Mayhem
Between all the fuss of crude oil prices going negative, one question is bound to arise — Why is the price of petrol not getting low in India?
Oil affects the supply chain of every commodity in one way or another. So, shouldn’t the massive fall in price help our pockets in this time of unprecedented crisis? It can help us directly by lowering the prices, but the Government does not let it happen. Why so? Lets try to find out the reason.
Inside The Monday Fiasco
Oil has been a matter of grave concern for major world economies and oil-producing nations for more than 3–4 months now. This even led to oil being more volatile than bitcoin.
On Monday, West Texas Instrument(WTI), the benchmark grade for oil pricing was trading/selling at negative prices. Futures contracts for the month of May were expiring on Tuesday. Purchasing a Future Contract puts you under a legal agreement to get the delivery of the set product at a fixed price on the day of expiry. Due to COVID-19 pandemic, industries are closed, transportation is restricted. As a result of which, Oil storage is almost full, leaving behind no place to store additional oil. The Future contracts of May delivery date were expiring on 21st April, contract holders who didn’t have any infrastructure to store oil were in dire need of selling these contracts. But there is no willing party on the other side of the transaction to buy these contracts because there isn’t any empty storage left. As a result, these contracts were trading negative, which means sellers were paying the buyers for their storage cost. Can you imagine!!
There are several oil types based on the difference in their origin, viscosity, usage, thickness, etc. The price of most of these is pegged to three primary benchmarks: WTI, Brent Crude, and crude from Dubai/Oman. Prices of all of these are quite correlated. Brent fell from its peak of $68 in January’20 to $17 on 22nd April’20.
Indian Petroleum Pricing Mechanism
As per the controversial Trade Parity Pricing Mechanism India follows, price that Oil Marketing Companies (OMCs) like IOC, BPCL, etc pays to refineries is determined by the weighted average of import price and export price of petroleum products with weights 0.8 and 0.2 respectively. As per the Report of Ministry of Petroleum Indian basket of crude oil represents the average crude oil processed by Indian refineries in the ratio of Brent Crude and from “Dubai’ and “Oman’ in the immediately preceding year which was 74.77:25.23 in FY2018–19.
As per the report from PPAC (Petroleum Planning and Analysis Cell), the price for Indian basket fell from 71$ in April 2019 to 33.46$ in March 2020 per barrel. That is 34.15Rs to 16.04Rs in March 2020. OMCs in their pricing system follow a 15-day moving average pricing system to lower the impact of international prices on retail prices. Adding the heavy taxes by Central and State government plus commissions of OMCs and dealers plus some extra costs makes the price we pay at our nearest refueling stations.
*Data from Prices
Government in the driving seat
State and Central Governments change their taxes on petroleum products and help in maintaining the prices constant which as a result helps in surging their revenues. In early March, excise duty on fuel saw its steepest ever hike in eight years of Rs 3 per litre on petrol to make it Rs 22.98. The excise duty on petrol increased 142 percent from Rs 9.48 per litre since the Narendra Modi government took charge for the first time in 2014. States too aren’t much behind in increasing VAT in such times. On Tuesday the Assam Government increased VAT on petroleum products by Rs 5 per litre making fuel prices rise despite the slump of crude prices.
As per Budget Report, in 2018–19 total of Rs 14 Lakh Crores were collected in the form of taxes out of which 3.5 Lakh Crore came from the petroleum sector which is almost 25%. Equally high tax was also collected by state governments. It states the importance of these taxes for the government. Due to the pricing mechanism of OMCs, no immediate changes in retail prices are seen. Overtime Governments also increase various taxes to fill their reservoirs leaving a negligible part for the common man. How much benefit of these increased taxes by the Government is transferred to the common man is indeed a topic of debate but we can’t answer that here.