Are Fuel Rates Going To Increase Now As Crude Oil Getting Costlier?

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Although petrol and diesel prices in India have been staying unchanged since May 21 when the central government cut the excise duty, international crude oil prices are on the rise. The Brent crude price on May 21 had stood at around $110 a barrel, which has now jumped to $122 per barrel. Oil marketing companies in India are refraining from aligning the retail fuel prices to the current crude oil prices due to the already high inflation prevailing in the country.

The price of Brent crude oil currently stands at $122.01 a barrel. Though it cooled off on Friday by $1.06 per barrel after US consumer prices rose more than expected and China imposed new COVID-19 lockdown measures, experts say the upside risks remain.

Since When Petrol and Diesel Prices Are Unchanged?

Petrol and diesel prices at local fuel pumps are linked to the international crude oil prices and changes are supposed to be aligned accordingly on a daily basis. However, the oil marketing companies, like BPCL, HPCL and IndianOil, are moderating the retail fuel prices since November 2021, when five states (including Uttar Pradesh) went to the polls. The retail prices of petrol and diesel were on hold between November 2021 and March 22, 2022, (after the poll results were declared).

A report by Moody’s Investors Service in March had said state-owned oil retailers in India took a $2.25-billion hit in revenues by holding back from increasing pump prices in the run-up to local elections. After March 22, the prices started increasing as a result of costlier crude, which push inflation. The retail inflation in April stood at an eight-year high of 7.79 per cent.

The prices are again on hold from adjusting to the current international crude oil since April 6. According to a petrol pump dealer, the retail fuel prices are currently benchmarked to $85 per barrel, against the current rate of around $120 per barrel.

On May 21, when the Centre and some states had reduced the taxes on the fuels, the retail prices of diesel and petrol came down. Since then, the rates are on hold. Last week, Petroleum Minister Hardeep Singh Puri said oil companies are responsible corporate citizens and that the government wasn’t dictating retail selling prices.

Why Crude Oil Prices Are Rising?

Oil prices dipped on Thursday but still hovered near three-month highs after parts of Shanghai imposed new COVID-19 lockdown measures, as strong gains in refined products contributed to an ongoing bullish backdrop for crude oil, said Mehta Equities Vice-President (Commodities) Rahul Kalantri.

He added, “Oil prices have been rallying steadily over the past two months, led by big increases in prices of refined products due to tight refining supply and surging demand. Peak summer gasoline demand in the United States continues to boost crude prices. The US and other nations have engaged in a series of releases of strategic reserves, but it has had limited effect as of yet with global crude production rising very slowly.”

Will Increasing Crude Prices Raise Petrol Prices in India?

The continuing rise in international prices of crude oil is putting pressure on state-owned oil marketing companies. The Moody’s report in March said the revenue loss for Indian Oil Corporation was estimated at $1 billion-$1.1 billion for capping petrol and diesel rates between November 2021 and March 2022. So, the low margin and losses usually force companies to go for price hikes.

Impact on Inflation

In the April bi-monthly monetary policy, the Reserve Bank of India (RBI) had said if the crude oil prices remain above $100 per barrel, the inflation will further rise. In the recent policy review last week, the RBI assumed the international oil price rates at $105 to estimate inflation.

“On the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7 per cent in 2022-23, with Q1 at 7.5 per cent; Q2 at 7.4 per cent; Q3 at 6.2 per cent; and Q4 at 5.8 per cent, with risks evenly balanced,” RBI Governor Shaktikanta Das said last week while presenting the monetary policy statement.

The rise in petrol and diesel prices have a cascading impact on the general inflation in the country, as it raises transport cost across sectors and hence increases retail prices of product and commodities, including vegetables.

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