Why Are Fuel Prices Not Falling Much, Despite A Crude Oil Tumble?
The fall in global crude prices has helped refineries & oil marketing firms recover their investments in BS-VI fuel.
(Update: India raised excise duty on petrol and diesel by Rs 3 per litre on 14 March, but there won’t be a retail price increase as falling crude prices will absorb this duty hike).
Crude oil prices are falling globally. And that should theoretically have a direct impact on the prices of petrol and diesel sold in India. While prices of fuel have dropped in the past few days, the lowering in price has not been proportionate to the fall in crude oil prices, despite it being “market-linked” now with a daily revision in prices.
A price war between Russia and Saudi Arabia has sent global crude prices tumbling. As of 12 March 2020, the retail price of petrol in New Delhi is Rs 70.14 per litre, while it is Rs 62.89 a litre for diesel.
The Indian basket of imported crude oil is currently at $36.50 a barrel. Take an exchange rate of Rs 73.27 to the dollar, that works out to Rs 2,690 per barrel. That’s a huge drop from the $65 a barrel that India was paying in January 2020.
Yet, petrol prices are down just Rs 5.72 a litre and diesel Rs 6.34 a litre from that time period. Here’s why.
Fuel Price Breakup
While the price of crude oil heading to refineries has dropped nearly 40 percent (even after the rupee depreciated against the dollar), retail prices of fuel haven’t dropped even 10 percent.
So who is making money? Not the petrol pump dealers. In fact, the margins of petrol pump dealers has reduced slightly. Dealer margin on a litre of petrol is down to Rs 3.55 a litre, while it is Rs 2.49 a litre on diesel. In January margins were slightly higher at Rs 3.59 a litre and Rs 2.52 a litre respectively.
Value added taxes haven’t changed. VAT is charged at 27 percent a litre on petrol and 16.75 percent a litre on diesel, and then there’s a 25 paise pollution cess per litre as well.
The big difference is in the refining cost and the margins that the oil marketing companies (OMCs) like Indian Oil, Bharat Petroleum and Hindustan Petroleum make. Most of the refineries are owned by the OMCs and a few private players like Reliance Industries.
In January, when oil was around $65 a barrel, the refining cost was about Rs 5.52 a litre of petrol, but when it’s down to $36 a barrel, the refining cost has gone up to Rs 14.55 a litre of petrol and Rs 18.28 a litre of diesel. This includes the refinery and oil-marketing companies profit margins.
It has always been more expensive to refine diesel than petrol – which is why diesel in some foreign countries is more expensive than petrol.
Part of the reason for the increase in refining cost is the shift to BS-VI norms, for which refineries have invested between Rs 3,000 crore to Rs 7,000 crore to upgrade their facilities.
The fact that crude oil prices have tumbled has worked in favour of oil refineries. It’s a good time for them to make up their investment, while still passing on just a minimal price cut to consumers.
Could they pass on more? Sure, they can.
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