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Understanding fuel price dynamics in India

The recent bull rally in global oil prices from $18 a barrel in April 2020 to $65 in February 2021 effectively means that crude oil prices have risen by an unbelievable 261 percent in the last 10 months. A good 25 percent of that rise has come in the last one month alone. Since more than 80 percent of India’s oil demand is met via imports, any surge in global Brent crude price has a sizeable impact here, as both petrol and diesel are now fully deregulated. According to the US Energy Information Administration (EIA), India is currently ranked behind the US and China as the world’s third-largest oil consumer. India consumed 206.2 million tonnes in 2017-18. The Organisation of the Petroleum Exporting Countries (OPEC) projected India’s oil demand to rise by 5.8 million barrels per day (bpd) by 2040—accounting for about 40 percent of the overall increase in the global demand during the said period. As per the EIA, India is set to replace China as a oil guzzling behemoth in the next few years.

The price of any commodity, including oil, is driven by demand and supply dynamics. Each time petrol or diesel prices rise in India, we should ask ourselves, have we done enough to contribute to greener fuels?

Goldman Sachs’s forecast from last year said that global oil demand will recover to pre-pandemic levels of 100 million bpd between January to August 2021. It also noted that demand will rise steadily but supply will grow slowly—with the supply deficit rising to 900,000 bpd during the first half of 2021.

Factors leading to the global rally in oil are, the $1.9-trillion stimulus package proposed by US president Joe Biden. Biden’s moratorium on federal land drilling, the revocation of the permit for the Keystone pipeline and the moratorium on all oil and gas leasing in the Arctic National Wildlife Refuge are the key factors driving the recent surge in crude oil prices. A slow increase in non-OPEC supply, rising winter demand, the snowstorm in Texas, depleting global inventories and Covid-19 induced supply disruptions, will also push up global oil prices.

Speaking specifically of the recent crude price rise, it has has been in the making since May 2020. Driven primarily by factors like output cuts to the tune of about 9.7 million bpd in May, June and July last year, the drilling by US shale oil wells falling to a 2-year-low of 7.63 million bpd, output cuts to the tune of 7.7 million bpd between August and December 2020 by Saudi Arabia-led OPEC and of course, demand recovery in China, the price rise was bound to happen.

Theoretically, for every $1/barrel fall or rise in Brent Crude price, product prices rise or fall by 0.45/litre, assuming all other variables and factors remain constant. However, these factors which include the rupee-dollar exchange rate, cess, refining cost, import duties, shipping charges, freight rates and dealer commissions, and profit margins are never quite constant in the dynamic real world.

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