Shishir Asthana Moneycontrol Research
A record high diesel price means different things to different people. For the consumer, it’s obviously a reason to worry. For the government, it’s one more problem to add to a growing list, so much so that the superstitious among its supporters may see several signs that its four-year run of luck has ended. And for the opposition, whose voice is growing louder by the day, it’s a godsent opportunity to corner Prime Minister Narendra Modi.
However, what is intriguing is that the diesel price has touched its highest point ever even as crude oil trades at less than half its peak price. Crude oil prices are currently at $70 a barrel as compared to $147 a barrel in 2008. Even allowing for a sharp fall in the dollar since then, this should not translate into the kind of diesel price increase we have seen.
Part of the reason for diesel prices touching a new high is a domestic phenomenon. In most part of the world, diesel prices are nowhere close to the highs. In India, nearly 50 per cent of the amount paid by the consumer for diesel and petrol goes back to the state and central government as taxes.
In order to increase his tax collection finance minister Arun Jaitley increased taxes on diesel and petrol nine times between November 2014 and January 2016. The entire benefit of low oil prices went to the government by way of higher taxes. The government needed the boost to make up for the shortfall on account of lower tax collections which were affected by demonetisation and GST (Goods and Service Tax).
However, now that oil prices have started to rise, the finance minister is reluctant to cut taxes as taxes from other sources have not yet picked up. In October 2017, the government did cut taxes by Rs 2 per litre which meant that it had to forego nearly Rs 26,000 crore in tax collection. This was done at a time when diesel touched Rs 70 per litre mark. This time however, no government action is visible.
The government had scored some brownie points by asking state governments to do their bit in cutting taxes. Only four BJP-ruled states have reduced taxes, while others, including many BJP-ruled states have continued with their tax structure.
But the tax is not the only reason behind higher diesel prices. Diesel prices globally have moved higher but at a much faster pace than oil prices. This rise has more to do with diesel’s own supply-demand issues.
In India, a pickup in the economy has resulted in demand growth in diesel. Analysts expect diesel growth in the calendar year 2018 to be double that of 2017. Apart from the growing economy fuelling demand, diesel consumption is known to increase during election years. On top of this, supply been constrained. Two of India’s refineries, in Haryana and Gujarat, have been shut down for nearly two months for maintenance.
Post-peak winter season, many refineries in the USA and Europe have also shut down for maintenance. As a result of this, inventories globally have declined. Diesel inventory which had been severely impacted by the dual hurricanes in the US, could not completely recover. The rising demand in the US itself and shutdowns of refineries have resulted in diesel inventory being at a 15 percent discount to the five-year average.
While the diesel dynamics in the US was fragile, Europe increased its import from the US as Russian exports to Europe fell, which only added to the supply-demand mismatch.
This is expected to continue till the refineries come on stream. There is enough refining capacity globally to meet the rise in demand for diesel. But the rise can continue if oil prices continue to rise.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
