Fuel price freeze may go soon as crude surges past $118/bbl. Can government cushion consumers from hike impact?

OPEC+ said in a statement that the current volatility is not caused by changes in market fundamentals but by current geopolitical developments. Experts expect the upward trend to continue as Russia intensifies attacks on Ukraine.

But closer home, it’s the impending increase by OMCs that is more likely to impact consumers.

Eyes on OMCs

OMCs have not revised the retail price for petrol and diesel since November, despite the steep rise in crude oil prices which puts their margin under pressure. While the finance minister and the petroleum minister have denied that the price increase has been held back due to the ongoing state elections, the general expectation is that OMCs will increase prices after assembly elections in five states wrap up by March 7. 

In an interview to Moneycontrol last week, Mukesh Kumar Surana, chairman and managing director of Hindustan Petroleum Corporation Ltd, said that the OMCs had taken a long-term view on prices to avoid rate volatility for consumers. But he added that if prices continue to rise, the companies will have “no choice” but to align retail prices with crude oil prices.

A senior petrol pump dealer, on condition of anonymity, said, “No price correction has happened since November 4; we anticipate a gradual increase of up to Rs 10 a litre from March 8.” 

ICICI Securities’ analyst Probal Sen said, “The OMCs tend to look at their downstream earnings which gives them some cushion this time around as in the period where crude prices have risen and marketing margins have stalled, refining margins have done very well. Gross refining margin has gone up and that provides the OMCs some leeway to keep the prices low to some extent.”

“Typically every dollar increase in international product prices necessitates a 48-52 paise increase in per litre. The Rs 5 reduction that the government announced on excise duty took care of about a $8-9 increase in international products. That’s why despite the crude price rise, OMCs made reasonably healthy marketing margins until January. It is only in the last 20 days when crude prices have ramped up by $8-$9, they need to pass on the increase to customers. This would necessitate an increase of Rs 6-6.5 per litre; this number is going up everyday,” Sen said. 

OMCs -- Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation– can change the price of fuel sold at retail pumps every day to align it with international rates. The final retail petrol and diesel price includes components such as– price charged to dealer, dealer’s commission, excise duty levied by Centre, and tax by states. While excise duty rates are uniform in the country, taxes charged by states vary. 

Can the government offer some relief?

The duty and taxes account for 40-50% of the price, and are a major source of revenue for the Centre and state governments. While a cut would give relief to consumers, it means a loss of revenue to the government. 

The Union Budget left the excise duty on fuel unchanged and introduced an additional  differential excise duty of Rs 2 a litre on the unblended variant from October 1. After the budget, the finance minister said that the government is closely watching the geopolitical developments and crude price movement, on the basis of which it will take a call on a possible excise duty cut on fuel prices.

The central government had last cut excise duty on petrol by Rs 5/litre and on diesel by Rs 10/litre from November 4 to provide relief from prices. Many states had followed and cut local taxes. Crude oil price was at $80 at the time.

“I would be surprised if they pass on the entire increase in crude prices to consumers in one go; they will probably do it gradually over the month. I don’t have any special insight into what exactly they will do and whether the government has the leeway to cut excise duty further,” Sen of ICICI Securities said.

Ratings agency ICRA said in a report that it expects the revision in retail sales price for high speed diesel and motor spirit warranted by the current surge in crude prices at Rs 6-8 a litre. 

“In our assessment, a rollback in excise duties to pre-pandemic levels can prevent any major jump in pump prices, thereby softening the impact on the CPI inflation trajectory, albeit at a fiscal cost of around Rs 0.9 lakh crore to the government of India,” ICRA said.

Petrol pump dealers also believe that a tax cut by Centre and states may be the only way to give some relief to consumers. “Dealers’ margins have not increased since 2017, even though our costs have gone up but the number of pumps has increased and the demand has split between the higher number of pumps. We will need an increase soon, so if the government can undertake an excise duty cut, it will cushion the price increase for consumers,” a petrol pump dealer said.