Recently, the prices of crude oil have fallen significantly in the international market. After talks between America and Iran and reduction in tension in West Asia, the prices of Brent crude have decreased significantly. However, despite this decline, Indian customers have not yet got any relief and the prices of petrol and diesel in big cities remain at the same level as before. This raises the question: Why are the prices of petrol and diesel not decreasing in our country despite crude oil being cheap? Let us understand the basic economics and government’s logic behind this.
**Oil Marketing Companies (OMCs) are compensating for old losses**
According to the Petroleum Ministry, when crude oil prices had increased significantly in the international market in the last few months, the government oil companies (IOCL, BPCL, HPCL) did not increase domestic prices in the same proportion; This was done so that the general public could be protected from the full impact of rising costs. These companies themselves bore the brunt of the ‘under-recovery’ (losses) to a large extent. Now that crude oil prices have come down, companies are compensating for those old losses.
**Time taken for cheap oil to reach refineries**
The government believes that the impact of the fall in crude oil prices in the international market may not be immediately visible in the domestic market. Today, crude oil bought at low prices takes about 30 to 45 days to get to India, get processed in refineries and finally reach petrol pumps. Due to this lag time in routing and shipping, there is no immediate relief in prices.
**Heavy tax and dollar impact**
India imports about 85% of its crude oil requirement, which is paid in US dollars. If the rupee weakens against the dollar, then the full benefit of cheap crude oil is not available. Additionally, a large portion of the price paid for petrol and diesel in India goes towards central government excise duty and state government VAT. Unless this tax structure is reduced, there is little possibility of a significant reduction in retail prices. Experts believe that if crude oil prices remain low in the global market for a long time, then oil companies may decide to provide relief to the general public in the coming weeks.
