Oil marketing companies increased retail prices of petrol and diesel on March 22 after they were unchanged for 137 days even as crude oil rose sharply.
Petrol and diesel prices were raised by over 80 paise a litre and industry experts expect them to be increased further.
Petrol now costs Rs 110.78 a litre and diesel Rs 94.94 per litre in Mumbai. In Delhi, petrol will be sold at Rs 96.21 per litre, while diesel will be available at Rs 87.47 per litre.
However, the price increase did not surprise the market. Here’s a look at why the auto fuel price increase was expected and what could lie ahead:
Why was the increase in fuel prices expected?
Indian Oil, Bharat Petroleum and Hindustan Petroleum typically revise retail petrol and diesel prices daily, based on the rolling average of international benchmark prices over the past 15 days. While prices of fuel sold to bulk consumers and aviation turbine fuel were raised, retail prices of petrol and diesel were left unchanged for almost 137 days even though crude oil prices had risen sharply.
Petrol prices were previously increased on November 2, a day after diesel prices were last raised. On November 4, the government cut the excise duty on petrol by Rs 5 per litre and on diesel by Rs 10 per litre. Crude oil prices were at about $80 a barrel at that time.
Brent crude futures surged to $139.13 a barrel on March 7 – the highest since July 2008 – driven by concerns over Russia’s invasion of Ukraine and potential supply constraints. While crude prices have eased to about $118 now, the state-owned oil marketing companies did not move to align retail fuel prices with international product prices.
Oil marketing companies can take a longer view on prices and align them to the international market over time in order to insulate consumers against day-to-day price volatility, HPCL chairman Mukesh Kumar Surana said in an interview to Moneycontrol on February 25.
Nayara Energy, which operates 6,500 Essar fuel stations across India, told Moneycontrol on March 21 that the decision by the state-owned oil marketing companies to leave retail prices of fuel unchanged despite a steep rise in crude oil prices resulted in a “significant drop” in margins.
Private companies including Nayara, Reliance Industries and Shell set prices on their own but given the competition, they are benchmarked to prices set by the oil marketing companies.
The government has denied any link between the freeze in fuel prices and the assembly elections in five states, which started on February 10. The general expectation was that prices would increase after the polls wrapped up in Uttar Pradesh, Uttarakhand, Punjab, Goa and Manipur.
A revision was on the cards after the elections ended on March 7 and so did not come as a surprise.
How much more can the prices rise?
Every $1 increase in crude prices can result in retail fuel prices rising by 50 to 60 paise per litre, according to industry experts. Crude oil prices have increased by about $38 a barrel since November, which could translate into an increase of Rs 19-24 a litre.
The price of bulk diesel is currently more expensive than its retail price by about Rs 25 a litre, indicating the extent to which they could be revised. But experts pointed out that the entire increase may not be passed on to consumers and the price rise would be gradual.
What can provide a cushion against retail fuel price rises?
Some officials from the oil marketing companies said they may look at their business as a whole before determining how much to increase fuel prices. An improvement in refining margins – the difference between the value of petroleum produced from the refinery and the price of raw material – can be used to offset the decline in marketing margins to some extent. This will help them absorb some of the impact of the crude oil price increase.
The industry is also hopeful that the Central government will step in with an excise duty cut, as it did in November, to give relief to consumers. This could also trigger cuts in state taxes. Duties and taxes account for 40-50 percent of retail fuel prices.
However, an excise duty cut will not be an easy decision for the government because a reduction would lead to a loss of revenue.
The government will also be mindful of the cascading effect of higher fuel prices on inflation. If fuel prices, especially bulk diesel, continue to rise, they will put upward pressure on prices of transported commodities, which may lead to an increase in prices of goods and services and impact headline inflation.
Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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