Why are fuel prices rising in India?

admin November 5, 2021
Updated 2021/11/05 at 1:48 PM

The price of crude oil is reaching its highest level since 2018, as the global recovery gathers traction. India’s petrol and diesel prices have reached new highs, and the Petroleum Ministry has declared repeatedly that it is in talks with major oil exporting nations to enhance crude supplies and decrease the official selling price for Asia. We look at the reasons behind rising crude oil prices and how India is dealing with them.

Brent Crude broke above the $85 per barrel mark earlier this week, achieving its highest level since 2018, thanks to a surge in worldwide demand as the global economy rebounds from the epidemic. Despite a dramatic spike in global crude oil prices, key oil producing nations have maintained crude oil supply on a progressively growing production schedule. Brent oil has almost doubled in price just a year ago when it was $42.5 per barrel.

Despite a steep spike in prices, the OPEC+ group of oil-producing nations maintained in their most recent round of meetings that they will boost overall crude oil production by just 400,000 barrels per day in November. After the rise in November, the output of the biggest oil-producing nations – Saudi Arabia, Russia, Iraq, the United Arab Emirates, and Kuwait – would still be around 14% below than reference levels.

In response to Covid-19 global travel restrictions in 2020, OPEC+ agreed to steep supply cutbacks in 2020, but the cartel has been reluctant to ramp up output as demand has risen. India and other oil-importing countries have urged OPEC+ to increase oil supply more quickly, claiming that high crude oil prices are jeopardising the global economy’s recovery.

Low crude oil supply from the United States has also helped to keep crude oil prices high. Crude oil producers that stopped output while crude oil prices were low, according to Ambit Capital analyst Vivekanand Subbaraman, maybe waiting to see whether high crude oil prices last before resuming production.

What effect would higher fuel taxes have on prices?

Increased tax rates are also contributing to India’s current record-high pricing. Last year, when the pandemic prompted a dramatic halt in economic activity, the national government boosted taxes on fuel by Rs 13 per liter and diesel by Rs 16 per liter to shore up income. In Delhi, central and state taxes account for around 53.5 percent of the petrol pump price and 47.6 percent of the diesel pump price.

However, sources in the finance ministry said the government isn’t contemplating cutting taxes to pre-covid levels since it has to pay a variety of programmes, including free rationing for the poor and the nationwide Covid-19 vaccination programme.

Rising crude oil costs, along with increased taxes, have led to petrol and diesel prices consistently breaking new records throughout the nation in 2021. Petrol costs Rs 106.9 per liter in the national capital, up to Rs 5.7 per liter in the last month, while diesel costs Rs 95.6 per liter, up to Rs 7 per liter during the same time.

After pandemic-related limitations, India’s use of petrol has recovered quicker than that of diesel, with petrol consumption up 9% in September compared to the same month last year, while diesel usage remains 6.5 percent below 2020 norms. Diesel is a vital fuel utilised in industry and agriculture, accounting for around 38% of petroleum product used in India.

In a research, S&P Global Platts Analytics predicted that demand for diesel in India would increase in the coming months, with the impending holiday season likely to speed up the country’s economic recovery and increase fuel consumption. However, according to Platts Analytics, India’s overall crude oil consumption would only approach pre-pandemic levels in 2022.

Is India’s effort to persuade oil exporters to decrease prices effective?

The administration claims it has reached out to important oil-producing nations, requesting that they increase crude oil output. The main cause for high international crude oil prices, according to Petroleum Minister Hardeep Singh Puri, is that “crude supply was held below demand,” which “is planned as a formula for high prices.” India has long advocated for Middle Eastern nations to eliminate the “Asian premium” that Asian countries must pay for crude oil since major oil producers set higher pricing for India than for the United States and Europe. Despite a 40-cent reduction in the official light crude selling price to Asia, Saudi Arabia continues to charge a $1.30 premium above the benchmark price for light oil shipped to India, compared to a $2.4 discount for European clients.

Experts have remarked that in the present market situation, when supply is less than demand, nations like India do not have much-negotiating power and that India’s bargaining leverage may be further eroded if we attempt to diversify crude oil procurement. Furthermore, cartels like as OPEC decide on production levels and price standards.

Dharmendra Pradhan, India’s then-petroleum minister, indicated in March that India would buy oil from whatever nation offered the best price and conditions. After Saudi Arabia and other OPEC countries failed to improve its crude oil production schedule despite growing crude oil prices, India shifted its crude oil procurement away from the Middle East and toward Latin America and Africa.

Saudi Arabia retaliated by raising the cost of transporting petroleum to India for shipments in July, putting a stop to India’s efforts to diversify its imports.

India’s top state-owned oil refiners are likewise attempting to pool their demand in order to get better oil procurement rates. Experts cautioned, however, that although grouping demand may help get a better bargain, diversifying consumption may result in smaller discounts from individual nations.

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