Why is diesel more expensive than petrol now?

Diesel is now dearer. Globally, diesel has been a more costly fuel due to the higher cost of production. However, in India, the price of diesel historically has been lower than petrol and this is largely attributable to the varied tax structure on the two fuels. The excise duty and the VAT (value added tax) structure had been lower on diesel.

However, in the past few months, there has been a sharp rise in duties. Hike in duty on diesel has been much more than that of petrol, thus making taxes on the two fuels almost equal. Thus, with a higher base price of diesel, the price in the retail market is now getting ahead of the petrol prices.

The excise duty hike

During the past few months, when crude prices were soft in the wake of the pandemic, the central government had announced hikes in the excise duty charged on petrol and diesel in order to shore up its coffers. The excise duty on petrol had gone up from around Rs 20 per litre in February to Rs 33 per litre now. Similarly, the duty on diesel had gone up from Rs 16 per litre in February to Rs 32 per litre now. The tax on petrol was Rs 9.5 per litre in 2014 and that on diesel stood at Rs 3.5.

(Figures in Rs)

Due to this steep jump in the excise duty, the benefit of the cheap global crude has not been passed on to the retail consumer and the price of petrol and diesel in retail outlets has remained high. Nearly 70 percent of the price paid by the consumer for a litre of petrol or diesel is towards taxes (excise duty and VAT).

Impact of marketing margins on OMCs

During the period of falling global oil prices, the OMCs had jacked up their marketing margins sharply. Margins, which generally stay around Rs 2-3 per litre, were taken as high as nearly Rs 13-19 per litre during April and May. Our calculations suggest that marketing margins are higher than Rs 5 per litre currently. In order to protect their margins, the OMCs have now started an upward revision of retail prices. (Figures in Rs)

The disconnect

There has been a noticeable price disconnect between the global crude and the retail charts of petrol and diesel here over the past few months. Despite a sharp correction in prices globally, retail prices remained high here. There was negligible correction in retail fuel prices from March to May when global Brent was slipping. Now that Brent crude prices have started building up, fuel retail prices are boiling.

Initially the retail price graph turned steady as the hike in excise duty was being made up for by the drop in crude oil prices. However, over the past few days, crude prices have slowly started inching up and are touching the $42 per barrel mark. Because of this, the retail prices of petrol and diesel have also started moving up, reflecting the global trend.

Outlook

The sharp rise in excise duty and marketing margins is keeping the retail fuel prices high. A steep revision in excise duty and intrinsically higher base price of diesel are the main reasons why diesel is costlier than petrol. While OMCs had jacked up their marketing margins during March-May, the current marketing margins seem to fall nearer to their long-term average. Given the hit on overall demand, OMCs have little cushion but to raise prices in order to absorb the rise in global prices.

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