Crude prices have fallen since 2022 but petrol, diesel retail prices remain same. Why have OMCs not cut prices?

With the  outbreak of the Russia-Ukraine war in late 2021, crude oil prices started gaining momentum. OMCs took a call to freeze prices in November 2021 to shield consumers from high crude prices.

The price of crude oil soared to as high as $140 per barrel in March 2022 on account of the geopolitical tensions. The OMCs, as a result, incurred huge losses on the sale of petrol and diesel due to the price freeze.

The companies hiked fuel prices in March 2022 before implementing the freeze again but still incurred under-recoveries on the sale of both petrol and diesel.

How has the price of crude moved since ?

The volatility in crude oil prices spiked in 2022 when Russia had sent troops into Ukraine, before tempering a but. But the recent volatility in prices is mainly on account of the conflict between Israel and Hamas, and its implications on the Red Sea. The Red Sea is an important trade route as it accounts for 10 percent of the world's oil, grain and consumer goods shipments while the Middle East accounts for one-third of global oil supplies.

Iran-based Houthi rebels have intensified attacks on the shipments through the Red Sea in response to Israel’s bombardment of Gaza, forcing shipping firms to divert vessels through other longer routes. Freight and the mandatory insurance costs, in turn, have surged.

Volatility in prices is also on account of production cuts by Organisation of Petroleum Exporting Countries (OPEC) and its allies, commonly known as OPEC+. The oil cartel recently decided to extend voluntary oil supply cuts of 2.2 million barrels per day into the second quarter of 2024.

However, compared to 2022 and first half of 2023, crude oil prices have remained relatively low and are trading around $80 per barrel due to a slump in demand from major consuming countries such as China and weak economic conditions witnessed in the major economies.

Who decides the price of petrol and diesel and how?

Typically, state-run OMCs—Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL)—revise retail petrol and diesel prices daily, based on the rolling average of international benchmark prices over the previous 15 days.

However, when crude oil prices soared, OMCs did not increase the retail price and froze it for a record 137 days beginning November 4, 2021. The timing coincided with when states like Uttar Pradesh went to polls, even though the government denied any link between the two. That freeze ended on March 22, 2022 and prices were revised regularly by a total of almost Rs 10 before it was frozen again from April 7, 2022.

The 132-day price freeze in 2021-22 hit OMCs in the subsequent quarters in 2022-23 as margins shrank and they reported losses. To provide relief to consumers, the central government in May 2022 had reduced excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre. Several state governments also reduced value-added tax on petrol and diesel following the Centre’s decision.

How have OMCs performed?

Compared to the huge losses in FY23, the OMCs have started booking profits in recent quarters but have left prices unchanged again despite softening crude oil prices, with an eye to make up for earlier losses.

In the third quarter of FY24, the consolidated net profit for IOCL came in at Rs 9,224.85 crore, a multifold increase from Rs 890.28 crore reported in the same quarter of the previous fiscal. Similarly, BPCL and HPCL reported profits of Rs 3,181.42 and Rs 529 crore in Q3, respectively.

In the first six months of FY23, the oil companies had incurred combined losses of over Rs 20,000 crore. The government had, at the time, provided a one-time grant of Rs 22,000 crore to OMCs for the losses incurred on the sale of liquefied petroleum gas.

As OMCs  have been making handsome profits for the first three quarters of FY24 and with the approaching Lok Sabha polls, the domestic market was expecting a fuel price cut. To be sure, the government has not completely denied the possibility of a price cut but has said the situation needs to be examined carefully before any decision could be made.

What is the government's stance?

Union Minister for Petroleum and Natural Gas Hardeep Singh Puri has recently said that a reduction in fuel prices could be considered after international crude oil prices stabilise. He said amid the ongoing crisis in the Red Sea, there was no predictability of insurance and freight costs, making it unfavourable for OMCs to take a decision on fuel price revision.

The oil minister also said the OMCs were still incurring under-recovery on the sale of diesel and pointed out that the companies bore huge losses when crude oil prices had skyrocketed in 2022. US benchmark Brent had touched an all-time high of $140 per barrel in March 2022.