How India keeps petrol, diesel prices stable despite surge in crude price

New Delhi:  The West Asia conflict has caused massive disruption in the global energy market, with crude oil prices surging by more than 40%. This has led to a sharp jump in energy prices globally. In India, however, so far the increase has been limited to cooking gas and industrial diesel and high-grade petrol.

Retail prices of normal petrol and diesel remain largely unchanged since May 2022. Officially, petrol and diesel prices are fully deregulated in India. Petrol was deregulated in June 2010, while diesel was freed in October 2014.

This means, retail prices of petrol and diesel are decided by Oil Marketing Companies (OMCs) based on their input costs. The bulk of their cost is related to crude oil.

India imports nearly 85% of its crude oil requirements. The surge in crude prices in the international markets has led to a jump in costs of OMCs. As the selling price remains unchanged, the margins have come under pressure.

According to ICICI Securities, OMCs are now facing a loss of Rs 13.5 per litre on retail sale of diesel and Rs 1 per litre on normal petrol.

How does it impact OMCs

Despite the deregulation, OMCs have been absorbing the impact of the fluctuations in crude price in the international markets. The operating framework of OMCs is referred to as counter-cyclical leverage model. This means that when the crude oil prices were low, OMCs kept retail prices at elevated levels, leading to higher margins and profits.

Since May 2022, the last major change in retail price of petrol and diesel, crude oil prices have fluctuated from over $100 per barrel, to $60 a barrel. This means that when the crude oil price was at $60 a barrel, OMCs were making higher profits. The high profits made during the period of low crude oil price, can help absorb part of the losses incurred by the OMCs now.

Crude oil price is the primary, but not the sole determiner of petrol and diesel prices in the country. The retail prices of petrol and diesel are also impacted by the factors like exchange rate, shipping charges, inland freight, refinery margin, dealer commission, central taxes, state VAT and other cost elements.

Prime Minister Narendra Modi’s government has tinkered with central taxes multiple times that have led to significant increase and decline in retail prices of key petroleum products. Value-added tax (VAT) imposed by states also form a substantial portion of the retail prices of petrol and diesel in the country. In fact, the wide variance in the price of petrol and diesel from state to state is largely due to VAT.

Stock prices of OMCs – Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum – have slumped by around 20% in the past one month. Share price of IOC slumped from Rs 187.50 recorded on February 27, to Rs 138.40 on March 24 on the BSE.

Discounted Russian oil played a key role in keeping margins of OMCs high, despite a spike in crude oil price in 2022, following the outbreak of the Russian-Ukraine war. Union Minister for Petroleum and Natural Gas Hardeep Singh Puri has said multiple times that Russian crude helped in keeping oil prices stable not only in India, but also globally, by preventing the surge.

The PM on Tuesday reiterated the government’s commitment to procure oil and gas from all possible sources.

“Earlier, India imported crude oil, LNG, and LPG from 27 countries. Today, India imports energy from 41 countries,” Modi told Rajya Sabha.

In the past decade, India has also prioritised crude reserves for times of crisis. “Our oil companies maintain significant reserves of petrol and diesel for emergencies. Over the past 11 years, more than 5.3 million metric tonnes of strategic petroleum reserves have been developed, and the country is working on arrangements for reserves exceeding 6.5 million metric tonnes,” he said.

“Alongside this, India’s refining capacity has also been substantially increased in the past decade,” he added. 

Brent crude oil price per barrel