Why The Oil Price Rise Isn’t Pinching You More

Think fuel prices are high? They would have burnt a deeper hole in your pocket if not for oil refiners and marketers, with some help from the government.

Retail fuel prices have not kept pace with the oil surge in the last six months. Petrol and diesel prices rose 9-11 percent during the period even as Brent crude, the Asian benchmark, jumped 45 percent to a three-year high of around $69 a barrel.

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That's because oil marketing companies like Hindustan Petroleum Corporation Ltd., Bharat Petroleum Corporation Ltd. and Indian Oil Corporation Ltd. chose to lower margins instead of increasing prices. For those unaware, India has deregulated fuel prices. Which means they are linked to market rates and change—or should change—every day.

India imports about 80 percent of the oil consumed in Asia's third-largest economy. Government levies kept the prices high even as Brent retreated from $115 a barrel about four years to ago to below $30 in early 2016. The fossil fuel began rallying again on production cuts by the Organization of Petroleum Exporting Countries in January last year. Low inventories in the U.S., the biggest consumer of fossil fuels, and geo-political tensions aided its rise.

Lower Marketing Margins

Indian oil marketers didn't hike prices proportionately. That hurt their margins, which reduced from Rs 3.6 a barrel for petrol and Rs 3.3 for diesel in July last year to about Rs 1 for both in December. Marketing margins is the difference between the cost to produce fuel and the price charged to dealers.

Excise Cut By Government

Even the government gave up on part of its income. On Oct. 3, it lowered excise duty on petrol and diesel by Rs 2 each. But the central levy on fuels is still twice of what was charged three years ago. (Read more about it here)

Stronger Rupee

Refiners pay in dollars to import fuel. Since the rupee strengthened 1.3 percent against the greenback in the past six months, it eased the burden as they paid less in rupees for every barrel of fuel purchased.

Falling Demand

Demand for petrol and diesel slowed down last year, keeping prices in check. Fuel consumption rose 4 percent in 2017. That compares with 7 percent growth in each of the previous two years.