Economy

Why the 75% Drop in Global Oil Prices Isn’t Reaching You

The back of a truck carrying petroleum in Bhubaneswar, Odisha. Credit: proxyindian/Flickr, CC BY 2.0

The back of a truck carrying petroleum in Bhubaneswar, Odisha. Credit: proxyindian/Flickr, CC BY 2.0

Record production in the United States (US), weakened demand from the Eurozone and emerging economies like China and Brazil, and Iran’s entry into the international market have effectively slashed the price of crude oil for India, from $106 per barrel in July 2014 to $26 in January 2016 — a 75% drop over 15 months.

So, why are you not seeing evidence of this price-cut at your local petrol and diesel station? The answer: As global crude prices reach a 11-year low, the Centre and state governments steadily increase excise duties and value-added tax, shoring up their revenues and keeping fuel prices high for retail consumers.

Although India imports more than 80% of its fuel requirement, which means declining global prices should, theoretically, have seen sharp declines in retail petrol and diesel prices, Indian consumers of petrol and diesel now pay about double the global rate.

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Crude Oil Prices in $/barrel of Indian basket, Retail Petrol and Diesel prices in Rs/litre
The Indian basket refers to a proportional mix of “sour-grade” Dubai and Oman oil and “sweet-grade” Brent crude oil

Retail prices of petrol and diesel prices in three states — Assam, Uttar Pradesh and Gujarat — show a variation of less than 10% during the current financial year, 2015-16, according to an IndiaSpend analysis. For instance, the petrol price in UP rose Rs.2 per litre, when global oil price halved over the same period.

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*Oil price for Indian Basket in $/bbl, Petrol price in Rs/litre

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*Oil price for Indian Basket in $/bbl, Diesel price in Rs/litre

Indian prices stay high because oil marketing companies (OMCs), such as Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd and Reliance Industries Ltd., add their margins, the central government adds excise, state governments add their own (value-added) taxes, and the dealers (petrol pumps) get their commission. The total of these is the retail price of the fuel you pay.

Excise hiked five times in three months

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The excise duty on petrol and diesel has been hiked five times over the last three months, increasing the excise duty on petrol by 34%. On diesel, excise duty has increased by 140%. The price at which OMCs sell petrol to dealers (petrol pumps) has been halved in two years. Over the same period, retail petrol prices have come down only by 15%. The value-added taxes imposed by states have more or less remained the same, but excise duties—both basic and additional—imposed by the Centre have doubled between 2014 and 2016.

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*OMC = Oil marketing companies; Dec-2015 and Feb-2016 data used due to non-availability of January data

The addition of central taxes on diesel is higher than those on petrol. Central taxes per litre of diesel rose to four times its value in April 2014 — from Rs.4.52 per litre to Rs.17.33 per litre in February 2016.

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*OMC = Oil marketing companies; Dec-2015 and Feb-2016 data used due to non-availability of January data

Retail consumers pay more tax on petrol and diesel than its actual price. Of the price you pay for a litre of petrol, 57% goes to the government as tax. Of the Rs.44 per litre of diesel, 55% is tax. If the excise duties on diesel had not been increased these two years, diesel would have cost Rs.32 per litre today. The direct effect of oil prices on cost of transportation of goods and thus consumer inflation has been demonstrated by research from Integrated Research and Action for Development (an autonomous research institute), as journalist and economist Swaminathan Anklesaria Aiyar wrote in this blog. Research on inflation in Turkey and Sri Lanka has underlined the effect of fuel prices on inflation. Lower fuel prices can keep inflation in check, according to this report in Business Standard.

Abhishek Waghmare is an analyst with IndiaSpenda data-driven, public-interest journalism non-profit.

  • NARENDRA M APTE

    (1) The demand for reduction in prices of petrol & diesel is very often made by consumers in India. However, I do not think that such a demand is a rational demand. My query is this: Can India afford to reduce domestic prices of petrol & diesel based on fall in international price of crude oil and how long this can be done? My contention is that reduction in prices of petrol & diesel would invariably lead to increase in domestic demand for both these products. We cannot afford to import unlimited quantity of crude oil and should therefore follow a sensible policy of containing demand for both petrol and diesel. (2) On this subject I also wish to say that our government should implement a pragmatic policy about pricing and taxation (and subsidies on some) of petroleum products. But this has not been possible as the party in power does not show required political will to implement such a policy. But I believe good fiscal management will be possible only if a long term, pragmatic policy regarding prices, taxation and subsidies for petroleum products is implemented by both the Central and State governments. Now is the right time to implement such a reform as international price of crude has been falling during last twelve months.

    • RaviBlr

      “Can India afford to reduce domestic prices of petrol & diesel based on fall in international price of crude oil and how long this can be done? My contention is that reduction in prices of petrol & diesel would invariably lead to increase in domestic demand for both these products. ”

      What logic is this ? How does the reduction of petrol and diesel prices increase its demand ? Demand is more or less constant. Read the article properly. The Govt. is not subsidizing the fuel prices any more. Fuel prices are deregulated. But on the contrary has increased the taxation so that the benefit of reduction of global crude oil is not reaching the retail consumer. That’s the point made by the article. The Govt. is getting the huge fiscal benefit.

    • http://mytechshout.com/ Gowtham V

      Government is making a good profit out of it by taxing it higher. Hope they atleast use that tax to build some good highways in india.

      • kishore

        Jaitley explained in Rajya sabha regarding the excise duty. Half of the excise duty given to state govt for fuel is it right ?
        Huge VAT in impact the crude oil price in india by state govt,