Simple economics behind the higher oil prices in India.



Higher oil prices are always a topic of debate between ruling govt. and opposition. And the both side have their own solid arguments. And now the Petroleum Minister Mr. Dharmendra Pradhan claims that global oil prices are the reason behind increased oil prices. And it is right as we see the oil cut deal from OPEC and NON-OPEC countries take crude oil prices at $67-$70 /bbl.
It means

All calculation given below as per 4th April’18

1bbl. Cost around Rs. 4,272/bbl.

And now if we calculate methodology of price:

Crude oil – Rs 26.86 /ltr. (Incl. Basic Custom, Add. Custom)

Refining Cost- Rs. 8.06 /ltr. (Incl. Entry tax, refinery processing, landing cost, OMC margin, transportation, freight)

Excise duty – Rs.19.48/ltr. (Incl. Basic excise, SAE, road and infra tax)

Dealer Commission- Rs. 3.59 /ltr. (Rs. 2674.74 /kl + 0.859 of Product billable price) LFR may be recovered

Sales tax- Rs. 15.90 /ltr (VAT 27% on petrol + 25p as pollution cess with surcharge)

Calculation of fuel

Fuel price= 26.86 + 19.48 + 3.59 +4.75 + 3.31 + 15.90 = Rs.73.9 /ltr. (Prices may vary outlet to outlet)

So, approx. Rs. 35.48 /ltr. Taxes are levied on liter of oil which is more than refinery cost of oil…so; it means that we are paying more taxes than actual prices of petrol.
But there is simple economics behind this that even with the higher oil prices the demand is still increases not on faster pace but demand is still healthy and growing.

India has to import 78% of raw fuel. And last year India paid around $70 billion despite of low prices globally. And higher oil prices impact currency rate. Indian rupees appreciated by 5% in last one year and now if we purchase more crude oil then it will impact current account deficit. And if we see export index it is down. It could lead to higher inflation and that would create more problems.

And now if we argued for petroleum may include under GST then it will impact with loss to State Exchequer.

And now the second thing that we will see as in favor of higher oil prices is Renewable energy. As we see govt. Is now moving towards use of renewable energy. And higher oil prices help govt. to pushing consumers towards cleaner fuel.
Solar rooftop is one of the energy source that get massive lead. This is replacing the diesel based generation units. And drop in prices of solar panel with stagnant diesel prices helped in replacing.

And now the Petroleum minister Pradhan says that “There is nothing hidden in fuel prices in the country. If international crude prices go up then India will also feel the pinch. We are sensitive regarding petrol and diesel price hike. We want petroleum under GST. I am hopeful that petroleum product will also come under GST soon.”

(For this you can refer my Article on GST)

If petroleum will come under GST then there is huge loss to State exchequer. I am not sure how they manage that loss. Now we have to wait and watch and hope for the best.


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