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Petroleum prices staying afloat

Updated: May 18, 2020

In the past couple of months, oil prices around the world have hit new lows. Some like West Texas intermediate and Louisiana light even hit a whopping -$41.18 and -$34.73 respectively. Essentially the oil producers were willing to pay buyers approximately $40 per barrel bought. With global lockdowns, economic activity and transportation have come to a minimum, reducing the aggregate demand for crude oil almost entirely. Though a large supply of stored oil is available for now, petroleum and diesel prices are expected to drop within countries in the future, considering they’re- at least at a base level- a function of crude oil selling prices.

However, what was quite surprising to note was that in the last month, petrol and diesel prices in India have continued to stay afloat at an average (amongst all metropolitan cities ) of about Rs. 73.24 per litre. While India may not be impacted by the negative oil prices, given that our crude basket consists of oil from Brent Crude, Oman, and Dubai, by theory it should still see a change due to the exceptionally low prices per barrel offered by their other suppliers (for June futures). With an ongoing lockdown and no significant demand for oil from industries, it’s mind boggling to understand why exactly prices are able to stay afloat and even increase in small increments.

Indian petroleum retail prices largely constitute of taxes. In the month of march, the government increased the excise duties- a tax on goods that is levied at the moment of manufacture- by Rs. 3 per litre, and have now added up to Rs.10 per litre for petrol and Rs.13 per litre for Diesel.

With a population of 1.3 billion people, the government of India sure has a lot of people to look after and therefore cannot let go of the benefits that the plummeting prices for futures are able to offer them. During a world wide virus outbreak with little to no production taking place, there is bound to be an exorbitant amount of public expenditure especially on health care and disaster relief in all sorts of ways possible. This would lead the country into a greater fiscal deficit due to their income having been largely reduced with a loss of both indirect and direct taxes from decreased consumer spending and unemployment. In order to gain tax revenue, the idea of implementing an increased excise duty came about. This should help the government earn at least an additional Rs. 1 lakh crore in revenue, reducing the aforementioned fiscal deficit. The government has increased the cap on the excise duty to give itself room for a hike in the near future to raise revenue in view of a tight fiscal situation. This escalation would generally result in a rise in petrol and diesel prices. But, most of that is adjusted against the fall in rates that have eventuated from the slump in international oil prices, thereby allowing tax revenue to flow through without burdening the consumer with an unfavourable change in price.

As India eases its lockdown measures and begins to- rather slowly- re open its economy, we also noticed the dependence on the sale of alcohol to produce fiscal revenue, with a 70% hike in prices. Excise taxes and a special duty on liquor caused such a large jump in prices, all accounting for government income. It can be argued that necessity goods such as electricity and water can also see a price rise in order to fund government expenditure, but that may not create the best situation for consumers that face what is basically either a loss of income or a pay freeze.

It seems that the goal for the government of India was to strategically use excise duties to generate a large amount of fiscal income in the least harmful way for the consumers. The lack of global and domestic demand for oil as well as inelastic demand for certain consumer goods created a clear pathway to do exactly that. Fundamentally, the decision was made in hopes to create an optimal situation, that could majorly benefit all the parties involved. It is now a just matter of whether the government uses the new streaming revenue as efficiently as possible during this time of crisis.

Author : Saumya Bothra

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