Energy consumption (and production) is the backbone of any economy. The oil and natural gas industry contribute to 15 percent of India’s GDP. The by-products of crude oil like petrol, diesel, kerosene, paraffin is widely used in manufacturing, production, and transportation. Crude oil is also traded as a commodity like gold and silver.
However, fluctuations in the fuel price is an on-going battle that the common man fights on a daily basis. A slip or rise in the rate of crude oil, directly and indirectly, impacts the cost of living. It affects the price of essential commodities like fruits & vegetables, interest rates, fuel bills, and things like travel, education, and trade.
Here is a chart showing the volatility of petrol and diesel prices in the last four years:
International market sources and the strength of our currency are the two top factors controlling petrol and diesel prices in India. Let us take a closer look.
How are the Petrol & Diesel Prices Determined?
The retail price of petrol and diesel is determined by the following factors:
- Price of crude oil import
- Value of Rupee versus Dollar
- Freight charges
- Excise duty and other taxes imposed by the central and state government
- Dealer commission
- VAT - As prices go up more tax is imposed (ad valorem)
Why are Petrol & Diesel Prices Volatile?
FIVE reasons why petrol and diesel prices remain volatile in India are:
- Dynamic Pricing System Vs. Administrative Price Mechanism
- Price revised every morning at 6 am starting June 2017 instead every fortnight
- Takes into account the minutest change in international oil prices
- Prevents vast leaps in prices at the end of the fortnight
- High Dependency of India on International Market Sources
- Only one-fifth of demand fulfilled from domestic production
- 80 to 84 percent fuel requirements are outsourced
- Top crude oil import countries in 2018-19 were:
- Fluctuations in Global Crude Oil Prices
$56.43 per barrel
$69.88 per barrel
$71 per barrel
$80 per barrel
Data Source: Petroleum Planning and Analysis Cell
- Strength of Indian Rupee
- Fluctuating INR vs. USD
- Political Jeopardy
- Trade war between China and the US impacts global prices
- Economic sanctions imposed by the US on Iran
However, the Indian government tries to regulate the retail price of petrol and diesel by imposing taxes.
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