Petrol Prices Are Going Up Causes and Where Will They Stop

September 19, 2018

The Why of the high petrol prices

In September 2018, petrol and diesel prices breached the history of price hikes with an increase in crude oil prices and the incredibly high excise duties levied.

Under the free-pricing regime in India, petrol and diesel prices are priced based on what the consumers are willing to pay for and do not follow increases in prices of crude oil. Input costs and other factors like supply and demand factors, political turmoil, interest rates, OPEC’s production dictates, the Asian premium paid by India can all play a significant role in the price of oil.

Why does it matter and what lies ahead?

With a near daily revision in prices, you might not always notice your monthly fuel outgo. Essential commodities, other goods, foreign trips, and loans will finally break the bank for the citizens. This impacts the government’s popularity especially over the issue of taxing basic fuels, and the extent of rising fuel prices on the decreasing supply in the world market has a negative impact on economic growth.

What lies ahead and where will petrol prices be?

While lining the government’s coffers with more than half the petrol price per litre in the form of taxes Petroleum Minister Dharmendra Pradhan has promised a ‘solution’, to the rising costs of petrol. Here are the options before the government.

The 3-Options

The first is the government can always reduce the taxes on petrol and diesel and ease some of the burdens of the consumers.

The second solution is to bring fuel under the GST slab of 28 per cent or 40 per cent on luxury goods. But, there is bound to be a severe backlash as petrol is and should not be considered a luxury item!

The third is a geopolitical option. India pays the ‘Asian premium’ which could be as high as $3-8 per barrel of crude procured. Any possible commitment from OPEC to do away with it will give the government the confidence to cut taxes since it will be assured that its import bill may be under control, at least for some time.

The price of domestic petrol and diesel will be the outfall of international crude oil prices and the policy of the government ahead of elections in 2018 and 2019. OPEC countries may in quest of increasing revenue needs, drive oil prices higher. American shale oil producers may rein in any further rise in oil prices. Speculation of a governmental fuel deregulation policy allowing oil marketing companies (OMCs) to price their output freely saw the shares of the government-owned OMCs take a tumble. The government could also force OMCs to sell with lower margins.

Your guess is as good as mine as to where oil prices are headed next! The current price rise will thus be a litmus test for the government’s commitment to reforms in the energy sector.


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