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Are Petrol & Diesel prices really high?

05 November, 2021


          
            Are Petrol & Diesel prices really high?

As of before Diwali, the fuel prices in India were the highest ever. And then the government reduced the price . But the spike in oil prices did not seem to worry the government. There were several states where even the price of Diesel crossed the ₹100 per litre mark. Even though the price of Crude oil is lower than its historical highs, the taxes and deregulation had increased the prices of the fuel in this country. And although the Petroleum Ministry had ruled out the possibility of the government intervening to regulate Petrol and Diesel prices in order to check the upward cost of fuel, they have finally succumbed. On eve of Diwali, the Government of India announced an excise duty reduction on Petrol and Diesel by ₹5 and ₹10 respectively. Some of the state Govt have also reduced VAT. You have to keep in mind that as of today, the EV segment is booming with new hope for the automobile segment and the Govt is committed to reducing the spend on fossil fuels, reducing the traditional fiscal deficit created due to obtain green carbon credits, pollution levels and are actively pushing consumers towards EVs & green fuel.

A lot of memes trolling this hike had surfaced on social media, especially when it crossed the psychological and emotional price of ₹100/litre.

Petrol price break-up in 2021 for Delhi

Based on the price data collected on 16th October, 2021 from the national capital – Delhi, the team did an analysis of the components that made up the final consumer price of Petrol and Diesel in India. When the Petrol price was at ₹105.49 per litre, the base price was ₹44.37 per litre. The central government charged ₹32.90 per litre as ‘Excise Duty’. The State Govt VAT was 24.34

Keep in mind that price of Petrol & Diesel is affected by multiple factors like international Crude price, forex, central & state govt’s duties & taxes etc.

Historically

Earlier, the prices were regulated/controlled by central govt, however, in 2010, then PM Manmohan Singh de-regulated the price of Petrol to stop paying subsidies to Petroleum companies and in 2014, PM Narendra Modi de-regulated the price of Diesel. As a result, the prices should have become more dependent on international market prices than before.

Price of Petrol & Diesel in 2002 in Delhi

Petrol was at ₹27 & Diesel was at ₹17 per litre. During that period, the Crude price was ₹8 per litre ($27 per Barrel).

But the situation today

Currently, price of Petrol & Diesel in 2021 as on 20-Oct in Delhi: ₹106 & ₹95 respectively. On the same day, Crude price was ₹40 per litre ($84 per barrel).

These prices have grown at a CAGR of 7.34% & 9.32% (annualized growth) and Crude price has grown at a CAGR of 8.3%. International Crude price has grown at 6% with a rupee depreciation value of 2.3% totaling 8.3%.

If we compare it with the average annual inflation, it is. 6.5%. (7%-9% of fuel inflation vs 6.5% general inflation - fairly in line, no huge difference).

Please note, the additional 2%-3% fuel inflation is due to our rupee depreciation against USD over time.

If we compare the price of 1 litre Petrol to 1 litre Crude since 2002 till now as shown in the graph, the average price multiple of Petrol to Crude was 4X and in case of Diesel to Crude it was 3X. Currently, the multiple is below its average i.e. 3X in Petrol & 2X in Diesel.

However, if we look back to year 2020 when the average Crude price was $32 per barrel and made its all-time low of $8 per barrel, people expected a drastic reduction in prices of Petrol & Diesel but in contrary, govt did not reduce the duties & taxes rather increased it and kept the price of Petrol & Diesel intact.

Currently, people were expecting a reduction in duties and taxes from both central govt & state govt so as to bring down the fuel prices. And the government has obliged.

But based on the data & comparisons, the rise in Petrol & Diesel prices perhaps are fair and ONLY the absolute number had crossed an emotional line of ₹100/litre. People never believed they will see a price of ₹100/litre for Petrol, and this was creating the chaos & panic. The price rise was actually bang in line with inflation.

By the way, ponder on this joke doing the rounds. A bottle of beer and a litre of Petrol now cost the same. Ergo - just drink, don't drive! But did you know how much a bottle of beer cost in 2002? Yes, that’s right exact just about the cost of one litre of Petrol ₹30/-


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If you want to have conversations around what we feel could be ideally suited to your financial goals. We are certified financial planners and pride ourselves on getting alpha returns to our clients and peace of mind on their deployment of financial plans.

Reach out to us

We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.

              


Bibliography

Petrol, Diesel excise duty cut by ₹5, ₹10 per litre on Diwali eve; cheaper fuel from today, FINANCIAL EXPRESS | Petrol, Diesel rates get cheaper further after these states announce more cuts, MINT | Petrol and Diesel hit fresh record highs as prices hiked across India, check fuel rates in your city today, THE INDIAN EXPRESS | Deregulation of fuel prices ‘much needed’ reform, says Manmohan, THE HINDU | Diesel prices deregulated, THE HINDU | Fuel Prices At All-Time High: What's Causing the Surge? How Is Price Calculated? THE QUINT


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