Will domestic petrol prices go up pre-polls?
Fresh geopolitical uncertainty has pushed global crude prices above $90 per barrel. How does it impact India’s oil marketing companies? Will they be forced to increase prices in the election season? Mint finds out.
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Why have global prices shot up?
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Brent crude prices have risen for two successive weeks and breached the psychological $90 per barrel-mark for the first time in 6 months. In tandem with that the Indian basket of crude price has also risen more than 10% since the start of the year (see table). The current rise in prices has been attributed to fresh geopolitical tensions following the attack on Iran’s embassy in Syria. While Israel has not taken responsibility, it has led to speculation of a direct retaliatory attack by Iran, which is the third largest Opec producer. With Israel-Palestine and RussiaUkraine wars raging, this could further cripple global oil supplies.
Though the code restricts the government from bringing any new policy or fiscal measure, revision of fuel prices does not fall under that category. So, oil marketing companies are technically free to raise or reduce prices as per their need. In 2019 for example, prices were marginally revised on a couple of occasions while elections were underway in the country.
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How are oil marketing companies doing?
Typically, OMCs break even when global crude oil prices are at $85 per barrel. Anything less and their profitability grows increasing the chances of a cut in pump prices. But any increase makes them unprofitable and strengthens the case for a price hike. Thanks to benign prices for much of FY24, the three state-owned OMCs— IOC, BPCL and HPCL—posted a robust ₹69,000 crore net profit for Apr-Dec 2023, way higher than the profit for all of FY23, when prices were above $90 per barrel for much of the year.
It is unlikely domestic petrol and diesel prices will be revised until at least the end of elections. Prices of both fuels were decontrolled between 2010 and 2014. Initially prices were revised every fortnight but from June 2017 oil marketing companies began to revise prices daily. In the last few years revisions have been erratic. Prices remained frozen for a record 23 months from May 2022 before the Centre announced a ₹2 cut on 15 March 2024. Rising crude prices almost negates any scope of a further cut. Thanks to low prices in 2023-24, oil companies have been very profitable and have the cushion to absorb any temporary spike.
Is the EC model code of conduct a factor? 5 Are fuel prices likely to go up in India? How does the government benefit?
Central and state governments generate revenues from oil by way of excise and customs duties, cesses, royalty and VAT. The Centre also earns dividend from the OMCs as well as corporate/ income tax from companies. In 2022-23, the Centre earned ₹4.3 trillion while the states got ₹3.2 trillion. Frequent hikes in excise duties and VAT rates over the past few years have led to an over-30% increase in revenue from oil for the government—from ₹5.75 trillion to almost ₹7.5 trillion between 2018-19 and 2022-23.