ANALYSIS
Is the fuel price hike justified and, why have prices domestically, risen?
Fuel prices in the last fourteen days have risen across India, with prices varying across states based on different VAT rates, charged by different States. Petrol as on June 20, 2020, rose to Rs 78.88 a litre in the national capital, while diesel climbed to Rs 77.67 per litre. In Mumbai, petrol is priced at Rs 85.72 per litre and diesel at Rs 75.54 per litre.
Is the fuel price hike justified and, why have prices domestically, risen?
Yes, the hike is justified, as Brent crude oil price, the benchmark that India primarily uses, has risen by about 162% from a low of $16 per barrel in April 2020, to close at roughly $42, on June 19, 2020. Since domestic fuel prices are largely market-driven, led by demand and supply forces, domestic fuel prices rising by about 10-11%, is par for the course, notwithstanding the "fuel politics", being played out by a clueless opposition, on this issue.
The recent Brent crude price rise has been driven by these factors--deep production cuts by Iraq, output cuts to the tune of 9.4 million barrels per day in May by Saudi Arabia led Opec and its allies like Russia, drilling by US shale oil wells falling to 2-year lows of barely 7.63 million barrels per day, fall in US crude oil output by 2 million barrels per day, demand recovery in China, which saw a 4.4% increase in industrial output in May and of course, rise in consumption demand in the USA, which saw retail sales rising by a solid 17.7% in May 2020.
It is important to note that the fuel price hikes locally, since June 7, 2020, commenced only after a long hiatus of 82 days, despite global crude oil prices surging dramatically in the interim.Net auto fuel marketing margins for oil marketing companies (OMCs) are back in the black, at about Rs 0.90/litre from minus Rs 1.28/litre on June 6, 2020.
In other words, OMCs have just about begun to modestly recoup, some of the heavy losses, of the past few months. Hence critics who allege that OMCs have been profiteering recklessly, are grossly mistaken. Fuel retailing in the country is dominated by state refiners and OMCs like Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, that own about 90% of all the retail outlets in the country. These OMCs suffered heavy losses when global crude oil prices crashed in March 2020. Due to the lockdown, in a benign gesture, the rise in excise duties and road cess in March were not passed on to end consumers but were borne by these aforesaid companies, despite the fact that fuel prices are largely market-driven in India.
To set the prices of petrol and diesel, Indian oil companies consider trade parity pricing (TPP). Trade Parity Price (TPP), consists of 80% of Import Parity Price (IPP) and 20% of Export Parity Price (EPP).
IPP represents the price that importers would pay in case of actual import of product at the respective Indian ports and includes the elements of Free on Board (FOB) price + Ocean Freight + Insurance + Custom Duties + Port Dues, etc. Similarly, EPP represents the price that oil companies would realize on the export of petroleum products. This includes FOB price + Advance License benefit or ALB for duty-free import of crude oil pursuant to the export of refined products. Consequent to the abolition of Customs Duty of Crude oil, the ALB is currently zero. To cut to the chase, while international crude oil prices do play a significant role, local fuel prices are derived from various other elements, which also play a crucial role, as is evident from aforesaid formulas.
For instance, often, higher gasoline cracks also result in local fuel prices remaining high despite a sharp fall in crude prices, as was the case in July 2019. The price of Brent crude fell 10.57% last July, while the petrol price in Mumbai rose 2.45% in that month. In August 2019 alone, crude prices globally, fell 8.68%, while petrol prices locally declined by only 0.95%, because gasoline and diesel crack prices went up by anywhere between a solid $4.5 and $9 per barrel. The "crack" is an industry term for the cost of separating the various component products of crude oil, including gases such as propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel, and heavy distillates like grease.
So gasoline and diesel cracks also play a role and it is not necessary that lower global crude oil prices will lead to a fall in local prices, in the same ratio. Conversely, a rise in global oil prices also does not lead to a proportionate rise in local fuel prices. Theoretically, every $1/barrel fall in Brent crude leads to a 0.45/litre reduction in product prices, assuming "other things" are constant. However, other things like the rupee-dollar exchange rate, cess, refining cost, import duties, shipping charges, freight rates, and dealer commissions and profit margins, are never quite constant in the dynamic, real world. This explains why there may be a direct "cause and effect" relationship between the direction of global crude oil and local fuel prices, but certainly not in the same degree and magnitude.
Recently, the Congress President, Sonia Gandhi, demanded that the recent fuel price hikes be rolled back. Hypocrisy is in the Congress' DNA. Ironically, Congress-ruled states have been at the forefront of VAT increases, with the Ashok Gehlot regime in Rajasthan, for example, raising VAT on petrol from 30% pre lockdown, to 38% currently and, VAT on diesel from 22% to 28%. It would be apt to conclude by saying that, politics aside, now that global crude oil price (Brent), has risen by over 162%, between March 2020 and June 19, 2020, it is only logical to expect measured price hikes, as India imports about 83% of its crude oil needs.
Opec and its allies are cutting back crude output by 9.7 million barrels per day in June and, by a similar amount in July, too. From August, till December 2020, Opec and its allies will cut crude output every month by 7.7 million barrels per day. Countries like Iraq, Nigeria, Gabon, Angola, and Kazakhstan have been asked to either compensate for the overproduction in May 2020 or submit revised plans, to ensure better and stricter compliance with the production cuts that Saudi Arabia seeks to enforce. That, coupled with an 8.6% rise in Chinese crude oil throughput in May 2020, on the back of rising demand, indicates that unless there is a second wave of Coronavirus induced lockdown globally and locally, which could destroy global and local demand, oil prices will hold firm and steady, for now. Of course, history has shown that Saudi Arabia and Russia have never really worked together for too long,in adhering to self-imposed production cuts. If that happens again in 2020 and the Opec led cartel breaks down, with Russia which is not an Opec member in any case but only an ally, global oil markets could again be inundated with an "Oil Glut". The oil glut could, in that case, lead to a dramatic fall in international and domestic prices. But again, an oversupply or glut is unlikely to happen anytime soon. In the near to medium term, Brent crude oil price is likely to trade in the $35-$60 per barrel range.
Needless to mention here that, the oil economy of India under Prime Minister Narendra Modi, has become far more resilient than it has ever been and, India's dependence on oil imports is slated to fall drastically due to the sharp thrust on gasification and converting India from a dollar guzzling oil economy, to a more planet-friendly, gas economy. India, under Modi, is planning to increase natural gas consumption by 2.5x, as part of the energy mix, to 15% by 2030, from the current level of 6.2%. Estimates suggest that daily gas consumption should increase to 600 million metric standard cubic meters per day (mmscmd) from the current levels of around 160 mmscmd. In the next decade, investments of over $60 billion are expected in the country’s gas infrastructure.
The Modi government’s plan to come up with a gas hub is likely to happen after the bifurcation of GAIL. The government is looking into a plan to unbundle the gas transmission and marketing business of GAIL. Various measures in the last 6 years like, linking domestic gas prices to international markets, developing Indian gas exchange (IGX), slated to start operations from next week and, implementation of the "Pradhan Mantri Ujjwala Yojana", among others, are steps that are transforming the country’s energy ecosystem.
Currently, the number of CNG stations across the country is 1,470 (slated to go up to over 10,000 CNG stations by 2030), and work for city gas distribution (CGD)is in progress across 174 districts. The number of households with piped natural gas (PNG) connections is expected to cross two crores after the successful completion of the 10th CGD round. This round aims to extend CGD coverage to 70% of the population across 53% of the country’s geography.Undoubtedly, from being an oil economy to a gas economy, it fits in brilliantly with Prime Minister Narendra Modi's clarion call of sustaining the fine balance between "people, planet, and profit".
Ms. Sanju Verma is an Economist, Chief Spokesperson for BJP Mumbai & Author of the Bestseller, "Truth&Dare--The Modi Dynamic".
Delhi-NCR Earthquake Today: Tremors of magnitude 4.3 jolt Delhi and adjoining areas
This film has broken world box office records, not Hollywood, Bollywood but...
Meet Satyam Pandey who got high-paying job offer, not from IIM, NIT, IIIT, his annual salary is…
Gurgaon couple reunites with lost dog after three-month search in Agra
Meet man, IIT graduate, who topped UPSC exam in third attempt, he is from...
Noida authority takes BIG action against promoters of 2 housing projects, as realty firm fails to...
WPL 2025: Ashleigh Gardner, Deandra Dottin star as Gujarat Giants beat UP Warriorz by 6 wickets
This city is the coldest, darkest and most polluted in the world, tourists are banned here due to...
New Fastag rules from tomorrow: Users may incur additional charges if...; check details
Inside Kareena Kapoor, Saif Ali Khan's son Jeh's mario-themed birthday bash, watch
Meet Indian genius, who got high-paying job offer, not from IIT, IIM, his annual salary is Rs…
Shoaib Ibrahim gifts new house to his mother-in-law, Dipika Kakar's mother gets emotional
Deepika Padukone joins Kartik Aaryan, Anil Kapoor, Jackie Shroff at Mumbai event; see viral photos
Man wanted in Canada's biggest gold heist found living in THIS Indian city, he is...
'Free Samay Raina': Badshah shouts at his concert in Gujarat
Amitabh Bachchan's son-in-law Nikhil Nanda faces legal trouble, FIR filed against businessman for...
'Rohit Sharma or Virat Kohli...': R Ashwin lambasts 'superstar culture' in Indian cricket
Bombay HC to hear PIL on Sushant Singh Rajput's death, actor's father says...
Ajay Devgn's absence from Kajol's Valentine's Day post sparks speculation: 'Kalesh chal raha hai'
Anil Ambani-led company's loss widens to Rs 3298 crore in just...; its business is...
Premanand Maharaj's morning yatra set to resume after..., it was stopped because...
Champions Trophy 2025: Gautam Gambhir, Ajit Agarkar clash over Shreyas Iyer's position in team
239 composite liquor shops to be opened in..., booze business ramps up in...
Mukesh Ambani may lose the position of Asia's richest after Reliance loses...in just...days
Elon Musk-led DOGE halts Rs 175 crore election funding for India due to...
Malaika Arora shares her Paneer Thecha recipe, here's how you can make it
Mahakumbh viral girl Monalisa steps into 5-star hotel for lunch for first time, see viral post
Meet CID-fame actor, who once did a show for Rs 20, lost his wife due to...now earns...
Vinod Kambli makes surprising move, former Indian cricketer decides to donate...
Sachin Tendulkar breaking heart on V Day with Anjali in tow is oddly satisfying, watch viral video
Ekta Kapoor to face police probe, Mumbai court orders inquiry for...
Lahori Zeera makers likely to get Rs 450 crore as fundraising from Motilal Oswal among others
'You're pregnant': Ileana D'Cruz expecting second child with Michael Dolan!
Akshay Kumar touches Amitabh Bachchan's feet at ISPL2 finale, their association goes back to...
Who is Lalit Modi’s new Valentine? All about Rima Bouri, IPL founder’s new girlfriend
India's big 'treasure' is hidden here, once THIS work is done country will earn Rs...
This country hits big JACKPOT, discovers one of world's biggest gold reserves worth Rs...
Roadies XX star Prince Narula, Yuvika Chaudhary demand Rs 20 lakh bribe? Here's what we know
What led to stampede at New Delhi Railway Station that killed 18 people? 10 points
King Kong: This 6-Foot-8 buffalo named the world’s tallest by Guinness World Records
Shakira’s metallic wolf gown took 600 hours to create, designed by THIS Indian couturier
84 year marriage, 13 kids, 100 grandkids, viral couple sets record
Harshvardhan Rane, Mawra Hocane react to Amitabh Bachchan's shout out to Sanam Teri Kasam re-release
Chhaava box office collection day 2: Vicky Kaushal, Akshaye Khanna film mints Rs 67 crore