Fuel Price in India: Relief or Not?

To tackle the negative repercussions of soaring global oil prices, India has decided to cut excise tax on both petrol and diesel by ₹10/litre. The decision comes amid geopolitical turmoil around the US-Israel situation with Iran. Also, serious supply issues continuing to affect the world’s energy resources.

Recent news updates suggest that the excise tax cut is now at ₹3/litre on petrol and at 0 on diesel.

Why Has the Government Acted?

Global crude oil prices have quickly escalated to a level that has forced every country to raise local fuel prices. Over the past couple of months, Brent crude oil has jumped to above $100/barrel (with many reports placing its value at as high as approximately $122). It is due to interruptions caused by the blockade of the Strait of Hormuz.

Petroleum Minister Hardeep Singh Puri was quoted as saying that several countries have increased their fuel prices within the range of 20% to 50%. In choosing to share the burden of increased prices with its citizens, the Indian government decided to implement a tax reduction.

Will Reduced Fuel Prices Result?

It appears that although excise tax has been reduced to zero (on diesel) and to ₹3/litre (on petrol). There will likely be no immediate reduction in consumer fuel prices. Industry insiders note that oil marketing companies (OMCs) are currently taking about a ₹48.8/litre loss based upon the current high price of crude oil.

Thus, it is expected that the tax reduction will be used to offset the losses incurred rather than be passed on to consumers at gas stations through a reduction in retail price. This means the government has taken steps to control inflation, but it is unlikely that consumers will feel the impact soon.

The ongoing disruption of the oil and gas transportation network globally due to conflict in West Asia has meant that global transport of these two commodities. It will be affected going forward. The Strait of Hormuz provides a vital route for the transport of energy. An estimated 20 – 25 million barrels of crude oil are shipped through this strait every day.

India is particularly vulnerable, as approximately 40% – 50% of India’s crude oil imports go through this route. Furthermore, a significant percentage of liquefied natural gas (LNG) and LPG used by households in India also originates from this region.

Is There a Risk of Fuel Shortage in India?

Despite rising concerns regarding possible fuel shortages, the government has assured citizens that there is currently no shortage of fuel. Government officials state that India has:

• Approximately 60 days’ worth of crude oil stockpiled in their reserves.
• Approximately 30 days’ worth of propane in their inventories.
• A total of reserves that comprise approximately 74 days’ worth of both crude oil and propane inventories.

Officials dismissed claims of fuel shortages as misinformation and warned against hoarding practices.

Actions Taken To Ensure Stability

To diversify supply away from one source, the government is quickly implementing projects. This will diversify its oil and gas sources for purchase. Also, the new contracts will leave the government with a sustained supply of energy in the event of a global supply disruption.

The excise duty on fuel is a key measure that protects the consumer from rising prices in other countries. However, there is still uncertainty regarding how long it will keep fuel prices down. As reported in past media stories, the primary objective of the measure is to stabilize the economy and to protect consumers from extreme price increases due to events happening around them, rather than to provide immediate support at the pumps.

The situation is still evolving and will depend on the global crude price cycle and other geopolitical developments.