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DNA Explainer: How rising crude oil prices, domestic taxes and fall in demand are affecting fuel prices in India

With petrol and diesel prices hiked by 28 to 30 paise, fuel prices have touched new highs across the country on Friday. Petrol has crossed the Rs 100 mark in at least six states as a result of a Rs 4.9 per litre hike in its price since the beginning of May.

This is the 23rd hike since May 4 and the 6th time in the month of June, taking fuel prices across the country to a historic high. Union Petroleum Minister Dharmendra Pradhan on Monday blamed a ‘surge in global crude oil prices’ for the rising domestic prices of petrol and diesel. 

Today we try to understand the role of rising crude oil prices with the rising domestic prices of petrol and diesel and also look into some other factors leading to fuel prices at a historic high.

Impact of rising crude oil prices

The price of crude oil has risen sharply in 2021 on the back of a recovery in global demand as the world economy recovers from the COVID-19 pandemic.

The price of Brent crude has risen by 37.1% to about USD 71 per barrel from about USD 51.8 per barrel at the beginning of the year.

The price of petrol and diesel are pegged to a 15-day rolling average of the international prices of petrol and diesel. 

Rate-ratio over the years

The current petrol prices are significantly higher than prices in FY14 when the average price of India’s crude basket was USD 105.5 per barrel.

The price of petrol was decontrolled by the UPA government in 2010 while the price of diesel was decontrolled by the present government in 2014. 

In June 2013, when India’s average crude basket was at USD 101 per barrel, petrol was retailing at Rs 63.09 per litre.

The petrol rate was about Rs 76.6 per litre when adjusted for the depreciation in the value of the rupee against the US dollar. 

In October 2018, when the average cost of India’s crude oil basket was at USD 80.1 per barrel, the price of diesel peaked at Rs 75.7 per litre. 

Impact of domestic taxes

Increasing central and state taxes on petrol and diesel are the key reason for the prices of petrol and diesel being at record highs.

The price of crude oil is only 3.5% higher than at the beginning of 2020 before the COVID-19 pandemic led to a sharp fall in the demand for crude oil.

In Delhi, central and state taxes account for about 57% of pump prices of petrol and about 51.4% of the pump price of diesel.

The central government had in 2020 hiked the excise duty on petrol by Rs 13 per litre and on diesel by about Rs 16 per litre to shore up revenues. 

The central government has not cut central taxes despite calls from the RBI that taxes on auto fuels should be cut to curb inflation. 

Central levies account for 71.8% of total taxes on diesel and 60.1% of total taxes on diesel in the national capital. 

Impact of fall in fuel demand

The recent surge in fuel prices can be attributed to the fall in the country’s fuel demand in May owing to the raging second wave of the COVID-19 pandemic.

The demand for oil fell 11.3% to 15.11 million tonnes compared to the previous month and down 1.5% from a year earlier, the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry said on Wednesday.

As several states and UTs have started easing their COVID-19 curbs amid a downfall in daily infections, the demand for fuels is expected to go up.

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