Sky is the limit for fuel prices?

By IndianCEO Team

Posted on January 17, 2017

To paraphrase Queen, Is this the fuel price? Is this just fantasy? Another price hike, one of life’s monstrosities. Fuel price hike is one of the things that can affect livelihoods across the economic spectrum. It hits the rich guy driving his BMW and the middle class guy driving a generic sedan. What about the guy who owns only a bicycle? Arguably he is hit the hardest, as fuel price hike means vegetable price hike, which would lead to this guy potentially not having three square meals a day. If it has an effect on everyone, why does the price keep on increasing?

There are two main reasons for rising fuel prices. The first is that world demand for fuel is exceeding exploration and refinery capacity. This is what has traditionally caused prices to rise. When supply is tight, disruptions or the mere threat of disruption to oil well or refinery capacity – such as war or a natural disaster – can cause prices to spike.

The second reason is investment speculation. Money from investment funds is being invested in commodities like food and oil in response to a weaker world economic climate. Investors are being prudent and do not wish to take risks with their funds. They turn to oil as demand for oil is never going to go down even in the near future. This investment in oil stocks is helping to drive up prices.

Generally, any international price changes are almost immediately passed on to the vehicle owners. This works well for consumers when prices are falling and when there are both price rises and falls, but is often seen as unfair when prices are continually rising.

Back home, we have to deal with a further set of issues. The central government has been consistently hiking excise and other levies to increase its tax kitty. The state governments also use VAT on fuel to increase tax revenues. For example, in Delhi (November 2014 vs March 2016), VAT on petrol has been raised from 20% to 27%. VAT on diesel has been increased from 12.5% to 18%.

Even if international oil prices are lowered, it need not lead to a lowering of prices in India. This is due to certain concerns of our government. The petrol price was Rs 64.24 per liter in November, 2014 vs. Rs 59.68 per liter today (only 7% lower as compared to 70% drop in international prices). The diesel price was Rs 53.35 per liter in November, 2014 vs Rs 48.33 per liter today (only 9% lower as compared to 70% drop in international prices)

 The primary reason is to reduce consumption. India already suffers a lot from environmental problems with its major cities already among the most polluted in the world. Also, India, like many European countries with high fuel taxes, has a negative balance of trade, a chunk of which is due to oil imports. Keeping the prices high reduces the consumption and hence lowers impact.

Today every Indian spends almost half of his income on food items. If the petrol price in India keeps on increasing, then every food item will get costlier. This in turn will affect other sectors in India and around the world. Eventually, more and more people will be pushed towards poverty line. Read Indian Business News.

Sky is the limit for fuel prices?