Explained: Global oil price jump and how it affects India

As global oil prices rise, it could mean more petrol and diesel price hikes in India if taxes are not slashed

Oil prices whizzed past $70 a barrel to reach pre-pandemic highs earlier this week as expectations for oil demand have surged on better outlook for demand in major countries and OPEC members sticking to a plan to ease supply controls gradually. This spells more trouble for India, where the price of petrol has reached historic highs.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies now predict a solid demand in recovery in the United States and China, the world's two biggest oil consumers but plan to maintain their plan to gradually ease the supply caps through July and increase the output by about 450,000 barrels a day thereafter.

Crude oil prices have been on a steady incline since the beginning of this year, when Brent Crude was trading at close to $52 per barrel kept aloft by positive signs of a post-pandemic recovery in global demand for fuel and supply cuts by key oil-producing countries. This marks a dramatic reversal in fortunes for the commodity whose futures had dipped into never-before-seen negative territory in April last year as the pandemic dealt a heavy blow to demand.

The OPEC countries had made and maintained massive cuts to their oil supplies to account for the sudden plunge in prices in 2020, but have slowly been raising those limits as demand improves. However, the relaxation in those caps is unlikely to dent the uptick in prices if demand outruns supply.

Problem for India

As a major consumer of fuel, the steep increase in crude prices is likely to hurt India, sending petrol and diesel prices skyrocketing. Since the start of the year, the price of petrol has been hiked by Rs 10.8 per litre, while diesel prices have been raised by Rs 11.5 per litre. Petrol prices have even breached the dreaded Rs 100-mark in several cities, with an astounding 43 hikes.

The problem for India is compounded by the fact that the Indian government charges some of the highest taxes on fuel, with state and central taxes accounting for more than half the price of petrol and diesel in many states.

Oil refiners in the country have said even current prices are lower than what they should be charging in line with appreciation in global prices and retail prices are set to rise further unless taxes are reduced.