How Crude Oil Price Surge Affects Fuel Price in India: A Weekly Report
The fuel price in India is one of the most sensitive and volatile issues that affects the common people and the economy. The fuel price in India is determined by various factors, such as the international crude oil price, the exchange rate of the Indian rupee, the taxes and duties levied by the central and state governments, and the profit margins of the oil marketing companies. Among these factors, the international crude oil price is the most influential one, as India imports more than 85% of its oil needs from other countries.
Crude Oil Price Trend
Crude oil price change from last week in different markets:
|Market||Crude Oil Price on Sep 5th, 2023 (USD per barrel)||Crude Oil Price on Sep 12th, 2023 (USD per barrel)||Change (USD per barrel)||Change (%)|
The international crude oil price has been on a rising trend since the beginning of 2023, due to various reasons, such as the recovery of global demand after the COVID-19 pandemic, the production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, the geopolitical tensions in the Middle East, and the supply disruptions caused by natural disasters and cyberattacks. The crude oil price reached $90 per barrel for the first time in 2023 on September 11th, after Saudi Arabia and Russia announced that they would keep their voluntary production and export cuts until the end of the year. This decision was taken to balance the oil market and support the oil prices amid the uncertainty caused by the new variants of COVID-19.
Fuel Price Revision
The surge in crude oil price has a direct impact on the fuel price in India, as it increases the cost of importing oil for India. The fuel price in India is revised on a daily basis based on a 15-day average of the international crude oil price and the exchange rate of the Indian rupee. However, there has been no change in the fuel price in India since September 1st, 2023. This is because the oil marketing companies have decided to absorb the increase in their costs and not pass it on to the consumers. The oil marketing companies are state-owned enterprises that are under the control of the central government, which has been facing pressure from various quarters to reduce the fuel prices or cut down on taxes.
Fuel Price Variation
The fuel prices in India vary from state to state and city to city due to different rates of VAT and other taxes. The taxes and duties account for more than 50% of the retail price of petrol and diesel in India. The central government levies an excise duty of ₹32.90 per litre on petrol and ₹31.80 per litre on diesel, while the state governments charge value-added tax (VAT) that varies from state to state. The taxes and duties are a major source of revenue for both the central and state governments, especially after the COVID-19 pandemic hit their finances hard. Therefore, neither the central nor the state governments are willing to reduce their taxes or duties on fuel, despite repeated requests from various stakeholders, such as consumers, transporters, farmers, opposition parties, and industry bodies.
Here is a table that shows the fuel prices in different cities in India as of September 12th, 2023, along with the difference from one week ago:
|City||Petrol (per litre)||Change from 1 week ago||Diesel (per litre)||Change from 1 week ago|
The fuel prices in India have remained unchanged since September 1st, 2023, despite the rising crude oil price in
the international market. However, some states have reduced their VAT rates on auto fuels, such as Maharashtra,
Punjab, Rajasthan, and Uttar Pradesh. This has resulted in some decrease in fuel prices in these states. On
the other hand, some states have increased their VAT rates on auto fuels, such as Himachal Pradesh and Kerala.
This has resulted in some increase in fuel prices in these states.
Impact of Fuel Price Hike on Indian Economy
The impact of fuel price hike on Indian economy is a complex and multifaceted issue that affects various sectors and segments of the society. Here are some of the possible effects of high fuel prices on the Indian economy:
- Inflation: High fuel prices increase the cost of transportation and production of goods and services, which leads to higher prices of essential commodities, such as food, milk, edible oil, etc. This causes inflation, which erodes the purchasing power of consumers and affects their consumption patterns. High inflation also affects the fiscal deficit of the government, as it increases the subsidy burden on cooking gas (LPG) and kerosene. High inflation may also prompt the Reserve Bank of India (RBI) to raise interest rates to control inflation, which may affect the credit availability and investment in the economy .
- Growth: High fuel prices may hamper the economic growth of India, as they reduce the disposable income of consumers and affect their spending on discretionary items, such as travel, entertainment, etc. High fuel prices may also affect the profitability and competitiveness of various industries, such as agriculture, manufacturing, transport, etc., which depend on fuel as an input or a factor of production. High fuel prices may also affect the exports and imports of India, as they increase the cost of trade and affect the trade balance .
- Energy security: High fuel prices expose India’s vulnerability to external shocks and uncertainties, as India imports more than 85% of its oil needs from other countries. Any change in the international crude oil price or supply affects India’s import bill and retail price. High fuel prices also increase India’s dependence on oil-producing countries, such as Saudi Arabia, Russia, Iraq, UAE, etc., which may have geopolitical or strategic implications for India’s foreign policy and national security .
- Environment: High fuel prices may have some positive effects on the environment, as they may encourage consumers to switch to alternative sources of energy, such as renewable energy, biofuels, electric vehicles, etc., which are cleaner and greener than fossil fuels. High fuel prices may also reduce the consumption and emission of greenhouse gases (GHGs), such as carbon dioxide (CO2), which contribute to global warming and climate change . However, these effects may be limited or offset by other factors, such as lack of adequate infrastructure, technology, policy support, consumer awareness, etc., for promoting alternative energy sources in India.
Future of fuel prices in India?
The future of fuel prices in India is uncertain and depends on various factors, such as the international crude oil price,
the exchange rate of the Indian rupee, the taxes and duties levied by the central and state governments, and the demand
and supply situation in the domestic market. There are different scenarios that could emerge depending on these factors.
- If crude oil prices remain high or increase further due to strong global demand or supply constraints; if exchange rate continues to weaken or depreciate further due to trade deficit or capital outflows; if taxes or duties remain high or increase further due to fiscal pressures or political considerations; if demand for fuel remains high or increases further due to economic recovery or consumer preferences; if supply of fuel remains low or decreases further due to domestic production decline or alternative energy challenges; then fuel prices in India will increase significantly in the future.
- If crude oil prices decrease or stabilize due to weak global demand or supply surplus; if exchange rate strengthens or appreciates due to trade surplus or capital inflows; if taxes or duties decrease or remain stable due to fiscal reforms or political consensus; if demand for fuel decreases or stabilizes due to economic slowdown or consumer shifts; if supply of fuel increases or remains stable due to domestic production increase or alternative energy development; then fuel prices in India will decrease or stabilize in
There are also other possible scenarios that could emerge depending on different combinations of these factors. Therefore,
it is difficult to predict with certainty what will be the future of fuel prices in India. However, one thing is clear:
fuel prices in India are likely to remain high and volatile in comparison with other countries unless there are major
changes in these factors. This will have implications for India’s energy security, economic growth, social welfare,
and environmental sustainability. Therefore, it is important for India to adopt a holistic and long-term approach to
address its energy challenges and opportunities.