Understanding the Complexities Behind Petrol and Diesel Prices in India Despite Crude Oil Prices Being Negative
Many people incorrectly believe that petrol and diesel prices should rise and fall in accordance with crude oil prices. Over the last 2-3 decades, this misconception has been perpetuated by both political parties, and even educated individuals have failed to understand the real situation.
Modern Education and Misunderstandings
Today, our education system is often criticized for inadequately preparing individuals to understand complex economic factors. As teachers educate us in school and college, we are expected to be educated and informed by others for the rest of our lives. This reliance on external knowledge sometimes leads to perpetuating incorrect beliefs, such as the relationship between crude oil prices and fuel prices in India.
The Factors Affecting Petrol and Diesel Prices
While crude oil prices are indeed a significant factor, they are far from the only contributor to fluctuating fuel prices. Here are some of the key factors:
Factor One: VLCC Transport Rates
VLCC (Very Large Crude Carrier) transport rates have significantly increased over the past few years. High transport costs add to the overall cost of bringing crude oil to the refineries in India, thereby influencing petrol and diesel prices.
Factor Two: Insurance Costs
In recent years, insurance prices for VLCCs have soared due to tensions in the Gulf region. Without proper insurance, it is impossible for any VLCC to transport crude oil, making it a costly aspect of the supply chain.
Factor Three: Reducing Gulf Dependency
India is actively reducing its dependency on Gulf countries for crude oil imports. This reduction in dependency, which was partly the reason for the 1991 economic crisis due to the Gulf War, increases the logistics cost. Gulf countries are geographically close to India, taking only 2-3 days to reach. However, importing crude oil from the USA can take several weeks, increasing the cost manifold.
Factor Four: Shipping Costs and Taxes
Shipping and taxation costs have also contributed to the increase in fuel prices. As an example, Saudi Arabia charges around 2 per barrel in shipping costs. Thus, even if crude oil is priced at $50 per barrel, the total cost becomes $52 per barrel.
Factor Five: Strategic Oil Reserves
India is building several strategic oil reserves to manage oil crises during emergencies like wars and to assist during high crude oil prices. These reserves require investment, which must be recovered from the sale of petrol and diesel.
Factor Six: Meeting Environmental Standards
Oil companies, such as Indian Oil Corporation (IOC), have invested heavily to meet the BS6 fuel production norms. IOC has invested around Rs. 30,000 crores for this, and if we factor in other oil companies, the investment reaches one lakh crores. This investment needs to be recovered within the next 4-5 years.
The Role of Taxes and Public Investment
A significant portion of petrol and diesel prices, approximately 50-60%, is derived from taxes. These taxes are reinvested into various public welfare programs. Over the last decade, India's population has grown by around 25 crores, and these people require free ration, education, roads, hospitals, and jobs. Billions of rupees are needed to provide these basic facilities. Therefore, the taxes from all sources, including petrol and diesel, are crucial for public investment.
It is important to understand that these taxes are not a loss but an investment in the public's future. While the general perception is that higher prices are a burden, these taxes are instrumental in supporting the nation's growth and development.
By demystifying the relationship between crude oil prices and fuel prices in India, we hope to educate the public and encourage a more informed discussion about economic issues.
Thank you,
Mrs. Lili Basu Biswas