Global Brent Crude prices have fallen from $69/bbl down to $26/bbl in the last 3 months. Despite this unprecedented fall in oil prices, the price of petrol and diesel in India has only fallen marginally. Have you ever wondered why the price of petrol and diesel do not fall in tandem with the fall in crude prices? The answer is simple. India imposes a huge excise duty on petrol and diesel and even the states have made petrol and diesel their favourite whipping boy. The demand for oil has been largely inelastic and hence it is a good candidate for the government to tax at the central level and the state level.
Why the oil prices cracked so sharply?
Blame it on the virus pandemic. In fact, the outbreak of Coronavirus spooked global markets in addition to a price war between major oil producing countries such as Saudi Arabia, Iran and Russia. Saudi Arabia, in its last OPEC meet in Vienna, had suggested to Russia to help them take the supply cuts from 2.1 million bpd to 3.5 million bpd. This was something Russia was not open to as they felt that it would only benefit the United States; as had happened in the past. When Russia backed out of the deal, Saudi Arabia had to put its Plan-B in action. Saudi knew perfectly that if the aggressive supply cuts were not done, then the contraction in demand would pull oil prices lower. They had two choices; for an additional supply with Russia in tandem or just let the oil prices drop and flood the oil market with crude. The Saudi government opted for the second option and flooded the oil market. They not only announced an expansion in daily output at 12.5 million bpd and cut prices across the board at around $30/bbl.
How the oil prices fell?
Brent crude prices have more than halved so far in 2020 sliding from nearly $64/bbl to $26/bbl. This is the sharpest fall in crude prices since the Gulf War of 1991. The fall in prices of the Indian basket, which is the benchmark on the basis of which retail prices of the fuel are determined in the country, also fell dramatically. From a monthly average of nearly $66 per barrel in December 2019, prices are down over 50% in a short span of time. In addition, there is one more aspect impacting the prices of oil and that is the weak demand. The Coronavirus syndrome has led to a sharp fall in demand. China, which accounts for 14% of world oil demand, saw its demand shrinking by 20% and that is taking its toll on oil prices.
Why have Indian petrol / diesel prices not fallen proportionately?
One reason for the slow fall in petrol and diesel prices is the skewed duty structure where the centre and the states try and skim away the price fall by hiking the excise duty. That means, the government skims away most of the price fall and Indian consumers do not get the benefit. The reduction in retail prices of petrol and diesel at the pump has not been commensurate to this. Petrol and Diesel in Delhi, Mumbai, Chennai and Kolkata are still around the same levels in the last 3 months although the price of crude has more than halved.
To better understand this phenomenon, one can look back at the last time crude prices fell sharply in December 2015 when for the month as a whole crude prices hovered at around $35.68/bbl. Back then, prices of petrol stood at Rs.59.98 per litre, nearly 15 per cent lower than current prices. Prices of diesel were Rs.46.09 per litre, almost 27 per cent lower than the current situation. Of course, those were different times then when prices of fuel were regulated and subsidised. Today things have changed but the weak crude prices are likely to yield a bonanza of $24 billion next year.
Lower crude prices are good for the macro-economy
India currently imports more than 83% of its crude requirement and pays above $100 billion for it each year. Softer crude prices should be good news. While it indeed is for the national exchequer, as the instances cited above indicate, it has not been the case for consumers at large. So what is getting lost in translation and why are consumers not getting the full benefit of low crude prices? There are two major reasons for that – foreign exchange rates and taxes on crude oil.
In December 2015, one would have paid Rs 64.8 for every dollar which due to the slowdown in global economy and flight of capital from India has depreciated to Rs 76.00. That is a sharp increase and impacts the landed dollar cost of oil.