Since the beginning of the year, we have constantly seen fuel prices heading record high almost every single month. We have constantly seen news like, ”Petrol and diesel prices are hiked again after a 2 day pause.”
In March 2022, retail prices of petrol and diesel were highest for the month historically. And in April, the country had faced its 10th petrol price hike in in 12 days after there was no change for 4 months since November. In 2021 alone, petrol prices were searched more than 23 times. Petrol Prices have crossed more than Rs. 100 per litre. And diesel prices are near Rs. 90 per litre. So, the question is:-
What is the government doing about it and how is it going to affect people like you and me?
And this is having a disastrous impact on Indian consumers. Several industries like the transportation industry which have already suffered a lot due to Covid have been drastically affected. Inflation in India has raised to 6.95% in March 2022, the highest since October 2022. On Nov. 25, a letter to the editor in Wall Street Journal, Joseph Carson, former C.M., at Alliance Bernstein, argued that today’s inflation rate is comparable to that during the 1973 oil crisis (Refernece of information)
How Petrol is Formed?
Petroleum is a fossil fuel, meaning that it has been created by decomposition of organic matter over millions of years. It is formed when large quantities of dead organisms are subjected to intense heat and pressure under the rocks. It is referred to as “black gold”.
How petrol price is decided?
In today’s time, our country uses a dynamic pricing system to decide the price of petrol and diesel. The way crude oil fluctuates in the global market. Similarly, fuel prices fluctuate in our country. So, we can say, it is deregulated. Govt. is not directly controlling the price of fuel. Rather, the global market is controlling the price of fuel. But, historically, it was not so.
- Many years ago, prices of fuel were regulated by the government. But, many problems arose because of this system because there was much pressure on the government to sell petrol at a lesser price.
- For this reason, in 2010, Dr. Manmohan Singh’s govt. deregulated price of petrol and in 2014, Modi’s govt. deregulated price of diesel.
- System was that the price of petrol and diesel used to change on the 1st and 16th of every month to the global market. So, Prices used to remain constant for about 15 days.
- But, on 16 June 2017, govt. Introduced a new scheme and said that instead of revising prices after every 15 days, we will revise it every day. Link of this news is this
- Every day, prices of petrol and diesel would be revised at 6 o’ clock in morning which is still prevalent as of today. There were basically 2 reasons for this:-
- Whatever small changes occur in global crude oil, will impact consumers be it profit or loss.
- 15 days used to be quite a long time. People started speculating that global crude oil prices have gone up and down. So, after every 15 days, the government. might increase the price. So, to stop this speculation, govt. decided to revise the price every day.
Factors affecting the price of fuel:-
- OPEC:- In September 1960, a group of oil producing countries united together and formed an organization called as OPEC (Organisation of Petroleum exporting countries). This included countries like Iran, Iraq, Kuwait, South Arabia and Venezuela. And this organisation was formed in order to avoid conflict between countries. But, in 1973, Arab-Israel war broke out and U.S. supported Israel and gave them supplies. And this made Arabs angry and they decided to use their oil superpoweer and they increased their oil prices from just 3$barrel to 12$barrel. And when all this happened, there was a devastating impact on economies all over the world. And just like a pandemic, entire world faced recession. At this time, Brazil came up with a new solution called as Ethanol-Blending process. In this process, a certain amount of Ethanol is mixed with Petrol, which decreases the consumption of petrol. So, at micro level, it could reduce the dependency on oil importing.
- Crude Oil Price:- As, crude oil is raw material for both petrol and diesel. Crude oil prices have been going up since the last many months. So, the price of fuel is also going up.
- Technology Change: After the use of Ethanol-Blending process in Brazil, ethanol vehicles were used in plenty and it caused a shortage of ethanol, which increased the price of ethanol as well as petrol.
- Taxation :- In reality, the government keeps saying that it is deregulated and everything depends on crude oil prices. But, govt. Control these prices through taxation. When crude oil prices went into negative, then the government. Increased its taxes. Recently, govt. Increased its central excise duty by INR 13/lt for petrol and INR 16/lt for diesel. Many states have also increased VAT (Value added taxes). So, this is a type of one-sided regulation by govt.
- Amount of Production of Oil :- We are heavily dependent on oil import. Currently, India is importing 80% of its oil from foreign market.
- Present Political Conditions:- Most imp, tensions have been rising in the Middle East. Russia and Ukraine are in major conflict. As time passes by, the situation is getting worse. There is either a possibility of price hike and even an oil crisis.
Why Petrol Price is so high these days in India?
Currently, India is importing 80% of oil from foreign countries. And we are heavily dependent on oil. When crude oil price increases, petrol prices increase and when crude oil prices decreases, govt. Increases its taxes.
Example:- on Feb 16, we were paying Rs. 89.29/lt for petrol.
Now, out of this, the base price is Rs. 31/lt. Excise duty is Rs. 32/lt and VAT is Rs. 20/lt.
And also includes freight charges, dealer commission, price would reach INR 89.29/lt.
In many states, State govt. Is charging more in taxes. If we compare it, most state govt. has not increased taxes that much. They have increased it by INR 5-10/lt. But, the biggest fault is the central govt. Who have increased their taxes by INR 13-15/lt within a year.
In 2020 beginning, central govt. Excise duty was just INR 20/lt but now, it’s about to reach INR 33/lt.
In 2014, this tax used to be INR 10-11/lt.
After seven years of BJP in power, they have increased taxes 3 times.
Now, the question is:- Why has the crude oil price been going up since the last many months?
Because when demand goes up and supply falls, prices will go up. Same happened with oil. When a lockdown was imposed in the entire world due to Covid 19, demand for oil went down, aeroplanes were not flying. Demand fell down and supply remained the same, prices slipped into negative. But, now, when economy is coming on track, the price of crude oil is going up.
We can think of a bond as something like a loan, that is issued by govt. And a company to raise money. But, there are basic differences between bond and loan.
- Generally, loans are given by banks to an individual or a company and bonds are issued by govt. Govt. takes money from others and issues bonds against it. So, govt. Has to pay interest on it.
- Loans are generally fixed but prices of bonds may fluctuate. Bonds can be traded. Similar to fluctuations in the stock market, prices of bonds may fluctuate.
Around 2012-2013, prices of petrol and diesel were increasing rapidly. Many celebrities even protested against it. Then, the congress party was forced to listen to people.
They decided to keep petrol prices low. How could Petrol prices be reduced:-
- To reduce taxes, excise duty. But, it could be done to a fixed limit. Otherwise, govt. Could face a huge revenue loss. So, the next option was to give subsidies to oil companies. Meaning, govt. Would literally pay oil companies to keep prices low. But, govt. Did not hold enough money at that time.
Then, govt. Issued oil bonds to oil companies. Govt. is basically telling oil companies to take bonds that they don’t have enough money to pay as subsidies. So, a bond is given as a coupon as a commitment. After some time, they would pay that money when companies would return bonds. Then, oil companies had these bonds. The govt. Is committing that in 2025, govt. Will pay such and such money to oil companies. Bonds are issued against it and govt. Will pay interest.
- It was around 2008, there were conflicts in middle east countries and faced recession. Price of crude oil rose to about 147$ per barrel and today, it is 70$ per barrel.
- So, Manmohan govt. thought that prices of fuel should be under control. And they issued the oil bonds.
- In 2014, Rs. 1340 billion was still due. After 2014, Modi govt. Is settling these bonds but there is another truth also.
- In 2015, 2 bonds matured worth 35 billion. And the remaining amount is still 1310 billion INR. This amount is still paid by the BJP govt. to oil companies.
- But, after 2015, no oil bonds have reached their maturity date. So, govt. Has not had to repay any bond since 2015.
- They have to pay just 100 billion/year for their interest.
- After 2015, each year, govt. is paying 100 billion per year for interest.
- Many bonds will mature after the 2024 election.
- All this data is publicly available on this website:- https://www.indiabudget.gov.in/doc/rec/annex10e.pdf
- Govt. earns much profit only just from its excise duty on petrol and diesel. Source for excise duty info:-http://18.104.22.168/loksabhaquestions/annex/175/AU4309.pdf
- In the financial year 2015-16, govt. had earned INR 1540 billion on excise duty of petrol and diesel. So, revenue of only this year could repay all the oil bonds, even those, which have not matured. Link of this news is:- https://timesofindia.indiatimes.com/india/govt-made-rs-1-99-lakh-crore-from-levies-on-petrol-diesel-in-2015-16/articleshow/57660008
- Tax collection of govt. had increased. It is at INR 3,350 billion. This amount had been earned by govt. In the financial year 2020-21 only by excise duty. Link of this news is: https://economictimes.indiatimes.com/news/economy/finance/govts-excise-mop-up-from-petrol-diesel-doubles-to-rs-3-7-lakh-cr-in-fy21-states-get-rs-20000-cr/articleshow/88005289.cms?from=mdinfo:-http://22.214.171.124/loksabhaquestions/annex/175/AU4309.pd
Comparison with other countries:-
- Price of Petrol in Pakistan is Rs. 50/lt.
- In Sri Lanka, it is Rs. 60/lt.
- In Nepal, it is Rs. 70/lt.
- In Afganistan, it is Rs. 37/lt.
- Price of Petrol in South Korea is Rs. 119/lt.
- In Germany, it is Rs. 119/lt.
- In France, it is Rs. 126/lt.
- In Hong Kong, it is Rs. 173/lt. But, in these developed countries, the salary of people is more than that of India.
How our Govt. can control these hike in Price of fuel:-
Govt. can easily pay all the repayment of these oil bonds from excise duty of one financial year. Govt. has to accept that something is going wrong and we need to solve it.
- Bring Petrol, diesel under GST :- We now pay taxes on taxes.
- Tax other sources:- petrol and diesel are not luxury things. They are used by a common man. With every Rs.1 rise of excise duty on fuel, govt. earns Rs. 14,500 crore. But, Govt. can get these taxes from other sources like tobacco which is not necessary for everyone.
- Reduce dependency on oil:- There are 3 underground reserves in the county where 10 days crude oil reserves have been stored at low price cost. But, it is a short term solution.
If we achieve our 30% electric vehicle penetrate target, we can save Rs. 1 lakh crore each year.
- We are moving towards ethanol blending but very slowly.