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”.