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:

1. Price of crude oil import
2. Value of Rupee versus Dollar
3. Freight charges
4. Excise duty and other taxes imposed by the central and state government
5. Dealer commission
6. 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:

1. Dynamic Pricing System Vs. Administrative Price Mechanism
   1. Price revised every morning at 6 am starting June 2017 instead every fortnight
   2. Takes into account the minutest change in international oil prices
   3. Prevents vast leaps in prices at the end of the fortnight

2. High Dependency of India on International Market Sources
   1. Only one-fifth of demand fulfilled from domestic production
   2. 80 to 84 percent fuel requirements are outsourced
   3. Top crude oil import countries in 2018-19 were:

3. Fluctuations in Global Crude Oil Prices

Data Source: Petroleum Planning and Analysis Cell

4. Strength of Indian Rupee
   1. Fluctuating INR vs. USD

5. Political Jeopardy
   1. Trade war between China and the US impacts global prices
   2. 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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