How Is Petrol Price Calculated In India? Factors That Determine Petrol Price

Confused about the rising fuel costs over the past few years? Read on to find out exactly how petrol price is calculated in India

<div class="paragraphs"><p>Source: Eric McLean on Unsplash&nbsp;</p></div>
Source: Eric McLean on Unsplash 

The price of petrol in India has continued to rise in recent years, and there are multiple factors that have contributed to this, from rising prices of oil across the world to overseas shipping constraints and changes in the government’s excise duty and taxes on oil. At the time of writing, the price of petrol stands well above ₹100 in most Indian cities, while diesel prices have crossed ₹90 in many parts of India. In order to understand why the price of petrol has continued to rise in India, it’s important to understand exactly how the price of petrol is determined/calculated in India.

How Is Petrol Price Calculated in India?

Before 2014, the price of petrol was solely controlled by the government and the petrol prices were revised every 15 days. However, in 2014, the government deregulated the prices of petrol and diesel. Since 2017, the prices of diesel and petrol have been updated on a daily basis. Let’s understand how this new system works. Oil Marketing Companies (OMCs) in India such as Bharat Petroleum Corporation Ltd, Hindustan Petroleum Corporation Ltd, etc, revise the price of petrol on a daily basis. This revision in the price is overseen by the PPAC (Petroleum Planning and Analysis Cell), which falls under the Ministry of Petroleum and Natural Gas. The Oil Marketing Companies revise the prices at 6 AM every day on the basis of various factors like international product prices, taxation, transportation and other costs.

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Factors That Affect Petrol Price In India

The Petroleum Planning and Analysis Cell (PPAC) has also listed a few important factors that affect the revisions of petrol costs in India:

Crude Oil Cost: Crude oil is the unrefined oil from which petrol and diesel are extracted. The prices of crude oil internationally directly affect the prices of petrol and diesel in India. The crude oil prices are decided based on international supply and demand, future reserves, foreign relations, etc. 

Increasing Demand: The demand for petrol had gone down considerably during the extended COVID-19 lockdowns. So, production around the world had been decreased proportionally in many countries. However, the demand drastically increased once lockdowns eased and people returned to their pre-covid lives. However, the supply could not be increased so swiftly, leading to a demand-supply imbalance, causing prices of oil to increase worldwide. 

Taxes: One of the most influential factors when it comes to the price of petrol or diesel in India is the taxes that are levied by the Central and State governments. These tax rates keep changing, which directly leads to the price of petrol increasing or decreasing. 

Rupee To Dollar Price: The price of the rupee to the dollar also directly affects the price of petrol. Since around 80% of all oil used in India is imported, the price of the rupee also greatly affects the price of petrol. When the value of the rupee depreciates against the dollar, the prices of petrol also go up.

The final retail price of petrol that reaches consumers is calculated thusly:

Price of Petrol = Price at which dealers/distributors buy from OMCs + Excise Duty (Charged by the Centre) + Dealer’s commission + VAT(charged by the state government)

All the various factors listed above and other smaller factors that are unlisted end up affecting the final price of petrol in India. It is also important to note that petrol is not currently covered under the Goods and Services Tax (GST). Hence, the Excise Duty is charged by the Central government on petrol for tax revenue, whereas the State Governments charge VAT (Value-Added Tax).