Fuel Prices May Stay High Despite Falling Crude Oil Prices
Indian consumers aspiring for a immediate cut in petrol and diesel prices might have to in for a bit of a wait. While prices of global crude oil have fallen quite substantially in the past weeks, no major reduction in retail prices of petrol and diesel is expected anytime.
Union Petroleum Minister Hardeep Singh Puri has said the decision on the retail prices of petrol and diesel will rest on whether crude oil prices stay subdued for next two-three months. His statement comes at a time when public anticipation is building up with Brent crude slipping dramatically in wake of easing tensions in West Asia.
Why Aren’t Fuel Prices Falling Immediately?
The main reason is time difference between purchase of crude oil and sales of petroleum products.
Oil Marketing Companies (ocms, e.g. Indian Oil, Bharat Petroleum and Hindustan Petroleum) buy crude much before. Each batch of petrol/diesel being currently refined and offered at petrol pumps is essentially from the crude bought nearly 2 months back when rates were much higher.
The Petroleum Minister also explained the benefit of lower crude price cannot be immediately transferred due to the refiners continue to have the high cost inventory purchased during the peak of West Asia conflict still sitting on its books if international crude oil prices remain steady at current levels for another 2-3 months, then OMCs may revise the retail prices.
How the West Asia Conflict Impacted Fuel Prices
In the beginning of the year, rising tensions in West Asia drove up world prices of energy quite significantly and sharply.
Brent crude had risen to close to $120 pb now has fallen back to around $70 pb following diplomatic initiatives easing regional tensions. This rapid fall has raised hopes that fuel costs in India should also fall.
However, India’s pricing method operates with a time lag because refiners need to use up their more expensive, imported crude stocks before enjoying the fall in world prices.
Oil Companies Absorbed Massive Losses
One other great reason for the delay is the pressure faced by India’s state owned Oil Marketing Companies.
In line with government’s estimate to be at 74,781 crores were losses faced by OMCs on sale of petrol, diesel and LPG below cost during period of high crude prices.
During the peak of the world energy crisis, companies are said to have borne under recoveries of nearly Rs 2400 crore per day instead of passing the entire hike on to consumers.
While this policy did prevent Indian consumers from experiencing a much larger increase in fuel costs, it also negatively impacted fuel retailers’ finances. Consequently, it is expected that firms will be able to reclaim some of these losses prior to offering major price cuts.
Government Says India Handled the Crisis Better Than Many Countries
While explaining, the Petroleum Minister justified the staggered approach in fixing the prices of fuel by saying that fuel inflation in India was less compared to other developed countries and neighboring countries.
So, relatively petrol prices in India appreciated during the global turmoil by around 5.58%, compare to almost 20% increases in petrol prices in many of the developed nations, and in some of the neighbouring countries the hikes were even sharper.
The government went on to state that even with international supply shortages, India did not experience fuel shortages or long lines at petrol stations-a common sight in many other countries during high times of geopolitical tension.
Private Fuel Retailers Have Already Reduced Prices
In fact, some of the initial indications of recovery have started to show within the private sector for fuel retailing.
Earlier, private fuel retailer Nayara Energy has announced price cuts of close to 5 per litre on petrol and 3 per litre on diesel at its thousands of fuel stations.
An indication that the steep fall in crude prices at the international level is finally reflecting in the retail prices of fuel here in India can be seen, however, in the fact that even the state-owned OMCs (which have a stranglehold on the country’s retail fuel market) have not announced any correction yet.
What Will Determine Future Fuel Prices?
Whether Indian consumers get cheaper petrol and diesel in the coming months will depend on a number of factors:
Wide variations and stability in international crude oil prices.
No new political conflicts.
Recovery of financial losses suffered by OMCs.
Cost of freight and insurance (crude imports).
Demand and supply both globally.
If the Brent crude remains close by to the current prices and doesn’t experience much changes, getting the fuel prices down might be more feasible later in the year.
Will Consumers Get Relief Soon?
According to industry experts other than correcting sharply in crude prices retail fuel prices in India cannot be justiled instantly because of the inventory cycle and the pricing structure in the country.
Consumers should therefore not assume that they will see instant savings just because the world crude prices have dropped.
However, the next two to three months will be critical. If foreign crude prices hover at levels 10–15% below the present and if the geo-politcal situation is stable, the Oil Marketing Companies may get the space to pass on some of it to the consumer.
Impact on Inflation and the Indian Economy
Lower fuel prices would also have a wider impact on the economy as a whole.
Reduced cost of petrol/diesel can lead to inflation moderation, reduced logistics cost for the companies, lower operating costs for various sectors as well as disposable income of end consumer.
Could further help other industries including manufacturing, agriculture, aviation, and e-commerce, which take a substantial proportion of operating cost on fuel.
The generally weaker crude prices may under suitable conditions even support growth for investors and business as long the global supply chains are not disturbed.
The Bottom Line
Despite the world crude oil prices crashing by more than 43% in the past 6 months, Indian consumers may have to wait further to see a decline in petrol and diesel prices at fore courts.
The government continues to argue that though the subsidy on costlier crude bought during the recent world energy crisis is still being paid back by the stateowned Oil Marketing Companies (OMC’s), they are still making loss on a massive scale.
Until this comes to pass, the evolution of world oil markets, geopolitical course and the financials of India’s fuel retailers will be the guiding factors to how soon consumers will experience a significant cut at the pumps.
