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Crude oil prices in the international commodity market have once again raised concerns about the economies around the world. Global benchmark Brent Crude has jumped sharply and crossed the psychological level of $ 110 per barrel. This new surge in oil prices is being seen due to increasing geopolitical tensions in West Asia (Middle East), attacks on the Red Sea and major oil installations by Yemen’s Houthi rebels and disruptions in global energy supply. India imports more than 85 percent of its total crude oil needs from abroad, so this fire in the international market has the potential to directly affect the domestic market. The big question now arising in the minds of common citizens and drivers who commute daily from the petrol pumps of Lucknow, the capital of Uttar Pradesh, to the metropolitan cities of the country is whether there will be an increase in the retail prices of petrol and diesel in the coming days or whether the government oil companies will provide relief to the public.
According to global energy analysts, behind this sharp rise in crude oil prices, not only the increase in demand but also several serious global supply-related crises are responsible.
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Conflict and Houthi attacks in the Middle East: Houthi attacks on cargo tankers in the narrow waterways of the Red Sea and Bab-el-Mandeb have forced shipping companies to resort to longer and more expensive sea routes, leading to steep increases in freight rates and insurance premiums.
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Crisis on Saudi Arabia and the Gulf region: The risk of sudden supply disruptions has reached its peak due to increasing military tensions near the major energy hubs of the Gulf countries.
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Decline in refining capacity and US reserves: The recent reduction in US crude inventories amid tight supply of diesel and fuel globally has further fueled speculation and buying in the futures market.
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Fear of new restrictions on Russian supplies: Refineries are being limited in their crude oil choices due to talks by Western countries about tighter regulations on Russian energy flows and ‘shadow fleets’.
When crude oil remains in the range of $80 to $85 per barrel in the international market, India’s public sector oil marketing companies (OMCs)—such as Indian Oil (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL)—earn strong gross refining margins (GRM) and marketing margins on fuel sales. But as Brent crude crosses $100 and now $110 per barrel, the procurement costs for oil companies increase rapidly. If retail prices are kept stable, companies have to suffer ‘under-recovery’ i.e. losses per liter on the sale of petrol and especially diesel. However, the silver lining is that Indian refineries have built up considerable financial buffers in the past through discounted Russian crude and a diversified basket, which helps absorb such short-term shocks for some time.
Energy experts have a very measured view on whether domestic fuel prices will increase immediately or not after this latest rise in crude oil prices. According to economic experts, the prices of petrol and diesel are not only decided on the daily prices of crude oil, but the government’s fiscal policy, inflation situation and political sensitivity also play a big role in it.
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Wait and Watch Policy: Instead of immediately passing on this surge in international prices to consumers, oil companies will keep an eye on the average trend over the next 10 to 15 days. If this rally is only temporary or speculative and prices soon return below $100, a change in retail rates may be avoided.
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Excise duty and tax reduction option: If Brent crude remains above $110 for a long time, the central and state governments have the option of making limited cuts in central excise duty or state VAT to control retail inflation, so that there is no direct burden on the pockets of the general public.
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Impact on inflation and economic growth: If fuel prices increase, it will have a direct impact on freight and logistics costs, which may lead to a rise in prices of fruits, vegetables and daily essentials. Therefore, the government’s top priority will be to keep fuel prices as stable as possible.
At present, the prices of petrol and diesel in major metros across the country have remained stable for a long time. In the national capital New Delhi, petrol is being sold at around ₹ 94.72 and diesel at ₹ 87.62 per liter. Whereas in the country’s financial capital Mumbai, petrol is priced around ₹ 104.21 and diesel ₹ 92.15 per liter. In Lucknow, the capital of Uttar Pradesh, petrol is available at around ₹ 94.65 and diesel at ₹ 87.76 per liter. There is some variation in prices between states and cities due to varying local sales tax (VAT) and freight charges. If the tension in the international market does not calm down in the coming days, then the further strategy will be decided in the joint review meeting of the Petroleum Ministry and OMC companies.