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28 January 2016, Gateway House

Petrol prices back to 2003 level?

The common Indian complaint is that, despite a global trend of falling crude oil prices, the price of petrol has not reduced. However, if the dollar price is examined with the price of oil, it becomes clear that Indians are paying less for fuel now than they would have, had the 2003 pricing trend continued.

Fellow, Energy & Environment Studies Programme

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Crude oil prices are currently at a 12-year low and oil is now cheaper than beer in the U.S. Meanwhile in India, petrol prices haven’t fallen as much, or so goes the common complaint. However, remarkable as it may seem, Indians today are paying less for petrol than what they were paying in 2003 – the last time crude oil price was below $30 per barrel.

Petrol price in New Delhi in December 2003 was Rs 32.7 per litre – versus Rs 60.53 per litre in December 2015 – an increase of 85% (Refer Table 1) over the past 12 years.

Crude oil is priced in U.S. Dollars – from 2003 to 2015, the Indian Rupee has fallen by 45% against the US Dollar – so Indian consumers need to pay that many more rupees due to the weaker currency. Secondly, while the ‘current’ price of crude oil may have fallen below $30 for some days; the retail fuel prices are set using average price for a somewhat longer period. During December 2015, the average price of Indian crude basket was $35.7 – 32% higher than the dollar price of December 2003. If these two factors are combined, the rupee price of petrol should be higher by about 92%.

Table 1: Petrol Price: Then and Now
  Dec-03 Dec-15 % Change
Crude Oil Price (USD) 27.11 35.68 31.6%
Re-USD Exchange 45.46 66.12 46.0%
Crude Oil Price in INR 1233.2 2359.162 92.0%
Petrol Price (Delhi) 32.7 60.53 85.1%
Source: Petroleum Planning and Analysis Cell

If petrol prices had moved in line with crude oil price and the stronger dollar – meaning an appreciation of 92%, retail price of petrol would have been Rs 62.8 per litre – as against the actual price of Rs 60.5 per litre. So while in nominal terms, petrol today is priced way above the 2003 level, in real terms, it is actually cheaper.

One fact is worth pointing out – the price of crude oil, in INR, currently works out to Rs 14.8 per litre. Most of what consumers pay at the pump is taxes. Since very few Indians pay income tax, the government relies on indirect taxes on goods to make up its kitty.

From December 2013 to December 2015, the average price of India’s crude oil imports fell from $107.3 per barrel to $35.7 per barrel – in other words, crude oil price fell from Rs 41.6 per litre to Rs 14.9 per litre – a drop of Rs 26.7 per litre. However, the retail price of petrol has fallen by just Rs 11 per litre over this period.  The remaining drop has been taken up by the government as additional taxes.

Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.

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