Mounting prices

After the start of war between Russia and Ukraine, the price of Brent blend crude oil has exceeded USD 105 per barrel. This is the highest price of Brent blend crude oil since 2014. Presently, India is importing crude oil from over 25 countries. Despite this, the impact of the war will be visible on crude oil in India as well, as it is almost completely dependent on crude oil imports to meet its domestic needs. Owing to the ongoing elections in certain states, the prices of petrol and diesel are not being raised, which may see a huge increase after the elections.

According to an estimate, due to the rise in crude oil prices, the country's current account deficit may reach 2.5 per cent of the GDP in the next financial year, which was estimated to be 1-1.5 per cent in the financial year 2021-22. The import of crude oil increases the current account deficit. In general, a single-dollar increase in the price of crude oil each year results in an increase of about USD 1.6 billion. However, there will be no crisis in the country even as the current account deficit widens, as the country's foreign exchange reserves stood at USD 630 billion as on February 11, 2022. The rise in crude oil prices will also not have much effect on the fiscal deficit, as now petroleum subsidy has been limited to gas cylinders. A provision of Rs 5,812 crore has been made on LPG cylinders for the financial year 2023, as compared to Rs 6,517 crore in the current financial year. However, common men will be impacted from mounting oil prices.

Apart from the current crisis, in 2021 alone, the price of crude oil in India had increased by more than 21 per cent. The reason for the increase in the price of petrol and diesel in India is not just the high price of crude oil in the international market. In India, the Central and state governments levy high excise tax and VAT on petrol and diesel, due to which the price of petrol and diesel in India is always high.

To understand the final price of petrol and diesel, one has to understand the full story of the conversion of crude oil into petrol and diesel. About 80 per cent of crude oil is imported in India, while 20 per cent of crude oil is produced domestically. Crude oil is produced in India by companies like Oil India, ONGC, Reliance Industries, Cairn India etc. Oil importing companies are called OMCs or Oil Marketing Companies. Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) are prominent OMCs. 95 per cent of crude oil is imported by these three companies. Companies like Reliance, Essar etc. import the remaining five per cent.

After importing crude oil from the international market, it is sent to the refinery, from where petrol and diesel are sent to the oil companies, on which the oil companies add their profits and send it to the dealers of the petrol pump. Thereafter, the dealer adds his commission on it, which is also determined by the oil companies. And then, the Central and state governments levy tax on it.

The retail selling price of petrol and diesel in India is determined daily. Government oil marketing companies review the international crude oil prices every fortnight i.e., on 1st and 16th day of each month. However, the new prices of petrol and diesel are applicable from 6 am every day. The process of daily pricing is also applicable in developed countries like America, Japan etc.

In a crude oil transaction in the global market, the buyer agrees to take a certain quantity of oil from the seller at a particular location at predetermined prices. Such deals are done with the help of regulated exchanges. The minimum purchase of crude oil is 1,000 barrels. A barrel contains about 162 litres of crude oil. Since there are many varieties and categories of crude oil, buyers and sellers have to make a benchmark of crude oil. "Brent Blend" is the most widely used global crude oil benchmark. According to the International Petroleum Exchange (IPE), two-thirds of the world's crude oil prices are determined based on "Brent Blend". The US has maintained its own criteria, which is called "West Texas Intermediate".

A rise in crude oil prices adds to inflation, making it difficult for the Reserve Bank of India to cut policy rates. The Reserve Bank had projected retail inflation to be 5.3 per cent in FY 2021-22 and 4.5 per cent in the financial year 2022-23. According to the Central bank, inflation in the current quarter will remain at the high level of the target range, while it will moderate from the second half of the next financial year. Despite this, in the monetary review of 11 February 2022, the Monetary Policy Committee (MPC) has kept the policy rates unchanged, while the Central banks of many countries of the world have been increasing the policy rates in view of the rise in inflation.

The Consumer Price Index (CPI) rose to 6.01 per cent in January 2022, higher than the target range set by the Reserve Bank, as against 5.66 per cent in December 2021 and 4.06 per cent in January 2021. At the same time, the wholesale inflation rate in January 2022 was 12.96 per cent as compared to 2021, while it was 14.87 per cent in November 2021 and 13.56 per cent in December 2021.

If the governments cut the taxes imposed on petrol and diesel, then the common people will get relief, but this will reduce the revenue of the Central and state governments, due to which their fiscal balance may be disturbed. Indian oil and gas companies can benefit more from the increase in the price of petrol and diesel and overseas Indians living in Gulf countries can send more money to their homes. However, the governments are in no mood to reduce excise tax or VAT. They fear a reduction in their revenue and the governments do not want to take such a risk in the Corona period. VAT is levied at different rates in each state, due to which the prices of petrol and diesel vary from state to state.

Till now petrol and diesel have not been included in GST. Their inclusion in GST can bring uniformity in their prices. In this way, reducing the price of petrol and diesel is entirely in the hands of the Centre, state government, marketing companies, dealers etc. But as of now, no one is ready to give up their share of earnings and, on top of that, inflation is also on the rise. Here, due to the start of the war between Russia and Ukraine, there has been a huge jump in the prices of crude oil. In such a situation, the common man is finding it difficult to get any relief on this front.

Views expressed are personal