Why are petrol prices hiking?

 In many areas of Rajasthan and Madhya Pradesh, the price has exceeded rupees 100/litre. In many other cities, it is near the range of rupees 90/litre. Why are fuel prices changing so frequently? Why are petrol and diesel prices climbing up every day in our country? How much does the global crude oil price impact the domestic petrol price? C’mon let’s understand in depth. 

Deregulation of prices

In today’s time, the government in our country uses the dynamic pricing system to decide the price of petrol and diesel. The wat crude oil prices fluctuates in the global market similarly, petrol price fluctuates in the country. So, you can say it is deregulated. This is to say the government is not directly controlling the price of petrol. Rather the global market is controlling what should be the price of petrol. Reading this, A lot of questions will come up in your mind. I will answer those questions slowly. But historically, it wasn’t always so. Many years ago, the price of diesel in our country was regulated by the government. That means the government used to decide the final price at which petrol and diesel were to be sold. But many problems arose because of this. There was much pressure on the government to sell petrol at a lesser price. It should not be sold at such a price, this much tax should be imposed and this much should not be done. For this reason, in 2010, Mr Manmohan Singh’s government deregulated the price of petrol and in 2014, the Modi government regulated the price of petrol. System was such that the price of petrol and diesel used to change on the 1st and the 16th of every month according to the global market. That is to say, the price used to remain constant for about 15 days. But on 16th june,2017, the government introduced a new scheme and said instead of revising the price every 15 days, we will revise it every day. Every day the price of petrol and diesel would be revised at 6 o’clock in the morning which is still prevalent as of today. Due to this very reason, you hear every day that petrol prices go up by a rupee or 50 paisa.

There were basically two reasons for doing so. First was that whatever small change happens in the global crude oil will impact the consumer and dealers be it profit or loss. The second being that 15 days used to be quite a long time. People started speculating that global crude oil prices have gone up and down so after 15 days, the government might increase the price of petrol so, before that date, we should get the tankers of our vehicles filled. So to stop this speculation and panic, the government decided to revise the price every day. 

Like you already know, crude oil is the raw material for both petrol and diesel. And in India, about 84% petroleum products are imported. Global crude prices have been going up since the last few weeks. Due to this reason, prices in India are also going up.

Why don’t consumers benefit?

You might ask me one question here, if the petrol price depends on the price of crude oil then when crude oil prices slipped into negative, why didn’t the price of petrol fall down for us? If you ask me this then it is quite a good question. Because in reality, the government keeps saying again and again that all of it is deregulated and everything depends on global crude oil prices. But in reality, the government controls these prices through taxation. When prices slipped into negative for crude oil then the government increased its taxes. Recently, the government has increased the central excise duty by rupees13/litre and rupees 16/litre on petrol and diesel respectively. Even many states have also increased VAT(Value Added Tax) on them. So this is a type of one sided regulation by the government, When crude oil prices go up then for you petrol prices go up and you pay more. When crude oil prices go down then the government increases its tax and petrol prices still go up for you and you still pay more. 

Breakdown of Taxes

From the picture above, On February 16th, you were paying Rupees 89.29/litre. Now out of this, the base price is rupees 31/litre approximately. The central government tax on excise duty is even higher than the base price at rupees 32/litre. The tax by the state government stands at around rupees 20/litre. After this, if you include freight charges and dealer commission, the price would reach rupees 89.29. This means that 60% of the price you are paying is simply going in taxes, either to the central or the state government. In many areas of many cities, this price has crossed rupees 100/litre because state governments are charging more in taxes.

Comparison with other countries

If you compare the price of petrol with the rest of the rest of the world then you will get to know how expensive they are in India. 

Credits: Businesstoday.in

The price of petrol in Pakistan is 65.2/litre. In Sri Lanka, it is 69/litre. In Nepal, it is almost 70 rupees/litre. The condition is so bad that people in the parts of Bihar bordering Nepal are smuggling petrol. They are bringing petrol from Nepal to India because they are still saving Rupees 20/litre. But it is not even the case that India is the place where petrol is the most expensive. There are many other countries where the petrol is much dearer such as Japan where it is at Rupees 94/litre.

In Germany, on an average an individual earns rupees 2-3 lakh per month. And in India, a common individual earns rupees 20-30k per month. In Germany, people have an average income 10 times that of India so people have that kind of purchasing power as well.

 Why are petrol prices hiking?

The answer to this question is quite simple. Basic economics says that whenever the demand for something goes up or the supply of it falls then its price will go up. When the demand falls and supply increases, then price will go down. This is valid for everything. The same is happening with oil. When lockdown was imposed in the entire world due to Covid-19, the demand for oil went down because aeroplanes were not flying and vehicles were not plying on the roads. Because the demand fell down and the supply remained the same therefore the price slipped into negative. Now as more people are getting vaccinated and lockdown is easing out, the economy is coming back on track, the demand is going up. Many oil producing countries have a group as well known as OPEC which also controls things from the supply side as well.

This blog seems pretty long, So I will explain the role of OPEC in the next blog. Stay tuned friends. If you like, then do share.