Why petrol, diesel prices will continue to remain high

Indian consumers may have to wait till next year, when a new government takes charge, for any tinkering in the auto fuel retail pricing mechanism to make it more transparent.

At present, the governments, both at the Centre and the States, seem to be in no hurry to part with the benefits of softening global oil prices at the retail end stating that they would rather wait and watch the market.

The price at which Indian refiners buy their crude oil in last 20 days alone has fluctuated from $73.09 a barrel on November 1 to $60.38/ barrel on November 23. Though the retail prices are changed daily, it is calculated taking the previous 15 days’ average.

Due to heavy tax components, petrol which would actually cost close to ₹40 a litre and diesel about ₹45 a litre ends up being sold as high as ₹80 a litre and ₹70 a litre respectively. This distortion in pricing at the retail end is also because of informal control of the government.

RS Sharma, former Chairman of ONGC, said “The current policy framework of daily revision in prices of petroleum products lacks transparency. Indirect interventions, based on political considerations, have been obvious in the recent past. Let the government institute an independent audit mechanism to validate the daily price fixations by the three public sector oil marketing companies.”

When prices fell last time the government did increase tax to fill its coffers. Given the current reverse trend, expectations were that it will react. But according to analysts, the government would rather make up for the losses they had when they reduced the taxes.

A senior BJP member said, “You must remember that the current trend in international oil prices is based on specific episodes that have happened in the geopolitical space. We don’t know how long it will last. The government cannot take radical decisions now.”

US sanctions on Iran

Sri Paravaikkarasu, Director - Asia, Oil at FGE, a global oil & gas consultancy firm, said: “Before addressing this question (on deregulation) we must keep in mind two things — the US-Iran sanctions played a key role in the government interfering in prices in the recent times, as no one expected the US to impose sanctions on Iran leading to a sharp spike in crude prices, and it also coincided with the Karnataka elections. This had led to the government stepping in.”

“We should also remember that the uncertainty on Iran sanctions has not gone away. Waivers have been given, and the US production is up because of which crude prices are seeing a downward trend. But, uncertainty still remains. To me, the government is also on a wait and watch mode. We should also remember that we have the general election next year,” she said adding “possibly the government will not do anything big on retail pricing side from now until it wins the next general elections and establishes a new government.”

In fact, even the market is not prejudging how crude oil will behave. According to Vanda Insights, “More analysts have joined the chorus since Friday by predicting that OPEC and non-OPEC ministers will most likely agree on a deeper cut when they meet over December 6-7 in Vienna — something we have been saying for a few weeks — but the oil market has been unable to shrug off scepticism, kept intact by a conspicuous lack of firm signal from the producers.”

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