Despite the huge fall in the prices of crude oil in the international market, the common man in India is not getting any relief in the prices of petrol and diesel. While crude oil has become quite cheap across the world, fuel prices in the country are skyrocketing. The public is constantly wondering why despite such a rapid fall in oil prices across the world, its impact is not visible on Indian petrol pumps. Let us understand the economics behind this.
Why have the prices of petrol and diesel not reduced despite the fall in crude oil prices?
Recently, due to rising geopolitical tensions in West Asia and the ongoing standoff between the US and Iran, crude oil prices in the international market crossed $120 per barrel. As a result, fuel prices increased in India too. Although the situation has improved slightly – crude oil prices have fallen sharply to $80 per barrel – petrol and diesel prices in India still remain high. This is because shipping freight charges and huge insurance costs for oil tankers passing through sea routes have increased amid the ongoing unrest in West Asia.
Why does crude oil take time to reach India?
According to Minister of State for Petroleum and Natural Gas Suresh Gopi, people should not expect immediate relief even after the fall in global crude oil prices. Crude oil purchased from the international market reaches India via sea routes – often passing through sensitive areas such as the Strait of Hormuz – which is a time-consuming process. Once arrived, crude oil is sent to refineries, where processing and refining takes a lot of time. Oil companies say the recent crisis has resulted in a direct impact on fuel prices of around ₹3.94 per litre, a burden that cannot be mitigated immediately.
Fluctuations in dollar-rupee exchange rate
India imports about 80 to 85 percent of its crude oil needs from other countries. Global transactions of crude oil occur entirely in US dollars; Therefore, the value of the Indian Rupee against the Dollar is important. Even if the prices of crude oil fall in the international market, if the rupee remains weak against the dollar, then oil companies have to spend more on imports. As a result, the full benefit of falling crude oil prices does not always reach Indian consumers.
**Profits of refining and oil companies**
Imported crude oil cannot be used directly in vehicles. It is sent to the big refineries of the country, where it is converted into petrol, diesel and other fuels with modern technology. The cost of refining in this process is added to the base price of the fuel. Oil marketing companies then add the cost of transportation to deliver the fuel to petrol pumps across the country and their profits, further increasing the base price.
**How are the prices of petrol and diesel decided daily in India?**
‘Daily Dynamic Pricing’ system is used to decide the prices of petrol and diesel in India. Under this system, state-owned oil companies review international crude oil prices and the dollar-rupee exchange rate every morning at 6:00 am. Based on this review, retail fuel prices in the country are revised. This is the reason that unless international crude oil prices remain stable for a long time and the cost of transportation in India does not go down, these daily price changes often do not show any significant difference.