Petrol pump
Petrol pump
K Photo by Gustavo Fring from Pexels

Since June 7, Oil Marketing Companies (OMCs) in the country have been increasing the prices of petrol and diesel in line with the costs of the fuel. Except on June 17 and June 28, other days there has been a hike in fuel prices. Since this continuous hike commenced, petrol and diesel have become costlier by almost Rs 12.

This hike in rates was after an 82-day break from rate revision amid the COVID-19 pandemic. While the cost of crude oil is low in the market, the question is why is fuel so expensive in India.

While taxes dominate almost 70 per cent of the cost of the fuel, there are other factors that play up as well. Below are factors that influence oil prices:

Currency difference: Crude oil is purchased in dollars and sold in India in rupees. So depreciation of Indian currency means that we spend more for the fuel.

Basic costs borne by OMCs: While the OMCs buy crude oil, which is in the raw form of petrol and diesel, it has to be refined at a processing unit, then there are refinery margins, OMCs take their margin and then transportation and storage cost as well. All these costs still form only 30 per cent of the overall cost of the fuel today.

When the crude oil prices fell way below Re 1 in the global market, the OMCs in India were struggling to find a place to buy at that rate and store oil. It was at the same time when the demand was low because of COVID-19 induced lockdown. So, India did take marginal benefit of that scenario, however, during that time the rate revision window was closed. So at the retail end no benefits was passed to the consumer.

Petrol Pump dealer commission: Until 2017, the commission to petrol pump dealers was a fixed cost per litre and not a variable cost. In the past, there was a uniform commission structure for all pumps irrespective of their size, but that was amended too. But post-2017, the OMCs hiked commissions paid to fuel pump dealers by up to 43 per cent for petrol and by up to 59 per cent for diesel. So, this is also variable costs which adds up in the fuel.

Taxes: At present, when the market value of crude oil is low, India is charging high taxes which consists of almost 70 per cent of fuel prices. So, these taxes are usually low when crude oil prices in the global market soar. So, the central and state governments have been tweaking taxes based on the market conditions.

While the central government’s excise duty and cess comprise of major portion of the taxes, Value Added Taxes (VAT) levied by state governments in their respective states is usually lower compared to central taxes. So usually both parties engaging in war of words when fuel prices are high — each asking other to reduce the taxes.

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