Crude prices decline leaves scope for a cut in retail prices

Analysts are pricing in hefty profit increases for Indian Oil, Bharat Petroleum and Hindustan Petroleum due to increase in blended margins of Rs 8-9 per litre of fuel up from Rs 3. Image: Sonu Mehta/Hindustan Times via Getty Images

How are petrol and diesel prices calculated in India?

The Indian government has always maintained that petrol and diesel prices are determined by the market. They point to internationally high prices (above $80 a barrel) as the reason for why petrol and diesel prices are where they are today. While the government sets excise and customs duty, it states that the oil marketing companies are free to decide on prices at the pump.

Movement of India’s crude basket and prices at the pump

In the immediate aftermath of the Ukraine war crude prices soared to as much as $130 a barrel. India’s average import bill went up to $116 in June 2022 when prices also hit a peak at the pump. In order to reduce the impact of the hikes the government had resorted to modest periodic hikes. On May 22 it had cut central excise on petrol and diesel by Rs 8 and Rs 6 per litre respectively. Since then international crude prices have fallen with India’s crude basket at $74.93 in June 2023.

Also read: The economics and politics of falling oil prices

The Russian angle

India has been a beneficiary of Russian crude that it has sourced in adherence to the international price cap of $60 on Russian oil. In FY23 Russia was India’s topmost supplier with 50.84 million tons of crude supplied. This has helped keep India’s crude basket prices lower than the global average. However, it is unclear how long Russia will continue to supply to India at a discount. 

Oil marketing companies’ profits

While it is unclear how much extra oil marketing companies are making per litre there are two indications that the amounts could be substantial. First, Hardeep Puri, Union minister for petroleum and natural gas said that it was time for oil marketing companies to pass on the benefits of falling oil prices to customers. Second, Q1 results for oil marketing companies are expected to show blended margins of Rs 8-9 per litre of fuel up from Rs 3 in Q4FY23. Analysts are pricing in hefty profit increases for Indian Oil, Bharat Petroleum and Hindustan Petroleum.

Also read: As demand for oil falls, Saudi Arabia and Russia face limits to pricing power

When could prices be cut?

Assuming crude prices stay in the $70-80 range price cuts could start in time for the festive season leading up to elections in Rajasthan, Madhya Pradesh and Chhattisgarh. The central government probably doesn’t want to forego the benefits of higher customs and excise duty for too long and so will keep the cuts as close to the state elections as well as the run-up to the general elections scheduled for May 2024.