Petrol and diesel prices in India have been on an exponential rise from the last year. If we compare these prices in January(2010), January(2015), January(2020) and January(2021) the petrol price in 2010 January were around Rs. 47 in 2015 around Rs. 65 in 2020 were around Rs. 74 and Petrol prices on 1st January were nearly around Rs. 83/litre and that of diesel were around Rs. 73/litre but now(August 2021) we see that petrol prices have crossed Rs. 100 mark in the majority of states and Union territory and are still on a rise, a similar situation is of diesel price which is around Rs.90 as of august 2021 and are also on a rise. If we only compare prices in 2020 and 2021(August) we will see an average rise of Rs. 15. If this hike continues soon we will see diesel prices in India also reaching a three-digit number.
India tops the list of most expensive oil prices
when compared to its neighbouring countries like
Bangladesh, Pakistan, Sri Lanka, Bhutan and Afghanistan.
We saw a lot of protest and criticism because of such a rise in prices and the people who are most affected by such a rise are middle and lower-middle-class families.
But now Let’s take a deep dive into why there is an upward trajectory seen in the petrol and diesel prices.
Union Minister of Skill Development and Entrepreneurship and former petroleum and natural gas minister Mr Dharmendra Pradhan said here are mainly 2 points that led to the rise of crude oil Jump at crude oil prices in the international market and India import’s around 80% of crude oil consumption. This is the major reason why we are witnessing such a rise in fuel prices.
Another reason said by the minister was the previous government had left oil bonds worth crores for repayment. He also stated that the current government is paying both the principal price and the interest.
Now let us have a look at these two mentioned points –
Why is there a rise in crude oil prices in the international market ?
In July the price of one barrel of Brent crude reached a 33 month high which was $75. Some of America’s top banks and financial services companies expect crude oil.
Answer to this rise PRICE is very simple and can be explained by the theory of “Demand and Supply”.
Resumption of activities after COVID-19 has boosted across the world along with some hopes of future demand for crude oil.
It’s not the end,
In 2022 when the oil was traded in negative figures the oil-producing companies made drastic cuts
because of this reason.
According to OPEC (Organisation of Petroleum Exporting Countries), the average consumption in 2021 is 96.58 million barrels per day,
which in 2020 was 90.63 million barrels per day.
It has predicted by IEA that by 2022 the demand would surpass the pre-pandemic demand.
Some good news is OPEC is planning to increase its total production by 2 million barrels per day between May and July.
What role does Iran play in crude oil?
Iran is a country that produces a lot of crude oil and is one of the major producers of OPEC.
But because of some sanctions between Iran and the US, it cannot export most of its production.
Because of the nuclear deal between Iran and the US. Also, Saudi Arabia made a voluntary production cut of 1 million barrels per day between February to April.
This cut is expected to be restored completely in June and July.
What impact does it have on India?
As India imports crude oil from OPEC and Saudi Arabia, OPEC is currently struggling to meet the demand for crude oil so prices are on a rise and not expected to fall anytime soon.
Some OMCs (oil marketing companies) still believe that the current high in oil prices are still lower than what refiners should be charging compared to international prices.
Coming to the second point, what are oil bonds and how do they affect oil pricing?First, we will see what are Oil bonds. Oil bonds are long term securities by the government in place of a cash subsidy.
They last for around 15-20 years and oil companies earn interest through it.Oil bonds are generally issued when the government is in danger of breaching the fiscal deficit target and aims to delay the fiscal burden to future years.
The UPA(United Progressive Alliance) government between 2005 to 2010 issued oil bonds worth Rs. 1.4 lakh crore.
Also keep in mind that there was a financial crisis during 2007-2008 which many economists believe to be the worst financial crisis since the Great Depression, this 2007-2008 crisis may be the driving force that led the UPA government to issue oil bonds.
Another reason may be that petrol and diesel were sold at prices lower than the international market price before deregulation of dates happened.
What’s more of concern is that Rs. 10,000 crores worth of bonds will mature this year and bond redemption from the last seven years has been only Rs. 3,500.
Another reason which adds up to high oil prices is the high levy of local taxes.
The central government and state government together levies excise duty, cess, and VAT (Value added tax) on fuel prices, of which VAT is levied by the state government and the other two by the central government.
All these taxes combine to 58% of the retail selling price of petrol and close to 52% on diesel. To get it simple if you buy petrol Rs. 100 per litre then Rs. 58 is being levied by the Central and state government.
Out of this Rs. 32-33 is the Union government’s excise duty and the rest is levied by the state in form of VAT.
How did excise duty go this high?
The answer is during the period 2014-2017 the international crude price began to fall and the government started increasing excise duty in November 2014. This means the fall of prices was not passed on to the consumers’ reason may be the Oil bonds issued.
Union minister Dharmendra Pradhan also stated that the increase in tax levied by central and state governments is because of various development work, especially during COVID times.
He also stated this development work will create more jobs.So these were the main reasons why petrol and diesel prices rose exponentially in 2021.
We may expect to see a decline in petrol and diesel prices once the Oil bonds have been cleared and International Crude oil prices become constant or fall.
However, now we can see the buzz of the electric vehicle increasing day by day because of oil prices, Eco friendly, and some electric vehicles are even cheaper than oil-consuming vehicles.
An electric vehicle that has only one moving part needs less periodic maintenance and is more reliable can surely be an alternative to the current oil-consuming vehicle.
The only drawback of the electric vehicle is the availability of a charging port.
Electric vehicle needs to be recharged after it has travelled a certain distance,.
which is not ideal for travelling long distances.
The complete installation of the charging port will take a lot but govt.
is doing their best in promoting electric vehicles.