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Fuel Prices At All-Time High: What's Causing the Surge? How Is Price Calculated?

·5-min read

Fuel prices in India are at an all-time high – with the prices breaching the Rs 100 mark in almost all state capitals.

The international market is witnessing a record surge in oil prices in October, as demand recovers post the COVID-19 pandemic slump, reported Reuters. Therefore, in India, crude oil prices are at a three-year high.

This has, subsequently, impacted the retail prices of petrol and diesel – which was already burning a deep hole in the pockets of the common man due to heavy tax rates.

According to multiple media reports, fuel prices in India are one of the highest taxed in the world.

How exactly is petrol price calculated? What is the impact of taxes and crude oil price on the retail price? The Quint breaks it down for you.

Also Read: 6th Price Hike in 6 Days: Petrol Crosses Rs 110 Mark in Mumbai, Rs 104 in Delhi

Who regulates the petrol prices?

Earlier, petrol prices were regulated solely by the government. It was revised once in 15 days. In 2014, the government deregulated the prices of petrol and diesel. Three years later, from 2017, it has been revised on a daily basis.

It works like this:

Oil Marketing Companies (OMCs) like Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation make this decision based on a number of factors. But this is overseen by the PPAC (Petroleum Planning and Analysis Cell) under the Ministry of Petroleum and Natural Gas.

According to a Lok Sabha response on 8 March, OMCs make these decisions based on international product prices, exchange rate, tax structure, inland freight, and other costs.

When is the price revised everyday?

The price of petrol and diesel is revised at 6:00 am everyday.

What are the factors affecting petrol prices in India?

There are a few factors exercising direct control over petrol prices. According to PPAC:

  • Crude Oil Cost: It is unrefined oil, the price of which fluctuates with demand and supply imbalance, foreign relations and future reserves and supplies

  • Increased Demand: With an increase in vehicle-owning population, demand increases which affects its price

  • Taxes: Prices change as per the changes in government policies imposing tax on fuels – there are two major tax levied on petrol. This is the excise duty and the value added tax (VAT)

  • Rupee and Dollar: When dollar strengthens against Indian rupee, buying cost of OMCs increase, and hence the price of petrol

Also Read: GST Reduced on Life-Saving Drugs, Petrol Left Out: What Did FM Sitharaman Say?

How is the price computed?

Price at which the petrol dealers/distributors buy from OMCs + Excise duty (which is charged by the Centre) + Dealer's Commission + VAT (which is levied by the state government) = Retail price of petrol

How is crude oil price in international market affecting petrol prices?

The price of the Indian basket of crude oil averaged at $43.35 per barrel in July 2021. By 14 July 2021, the price was $75.26 per barrel. As on 18 October, this price rose to $85.

"India imports more than four-fifths of the oil that it consumes and hence, any increase in the oil price internationally, leads to an increase in retail prices of petrol and diesel," wrote Vivek Kaul, in an article on The Quint, explaining price rise.

But what about tax?

Increasing central and state taxes is one of the primary reasons for rise in petrol prices. In the national capital, for example, central and state taxes account for about 57 percent of prices of petrol.

"In early May 2020, the central excise duty on petrol was increased from Rs 22.98 per litre to Rs 32.98 per litre. When it came to diesel, the excise duty was increased from Rs 18.83 per litre to Rs 31.83 per litre. From 2 February this year, excise duty on petrol and diesel was decreased by a few paise to Rs 32.90 per litre and Rs 31.80 per litre, respectively," Vivek Kaul wrote.

This was done at a time when the COVID-19 pandemic led to a steep fall in the demand for crude oil, thereby bringing down the prices. Therefore, Indians paid more for petrol even when the international prices fell.

""When it comes to petrol, the central government tax has gone up from Rs 10.39 per litre in 2014-15 to Rs 32.90 per litre now, a rise of 217 percent. This has led to a massive increase in tax collections from sale of petroleum products at the Central government level."" - Vivek Kaul on The Quint

This along with the VAT has led to a surge in petrol price. The pinch is felt even more now as crude oil prices are increasing due to rise in demand – a sign of recovery from the pandemic.

Why does petrol price differ from state to state?

Fuel prices in the country does not come under the Goods and Services Tax (GST). While the excise duty is collected by the central government for its pocket, the VAT goes to the state government's revenue.

This VAT differs from state to state, and hence the difference in price.

(With inputs from IndiaToday, Car and Bike)

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