A rebound in crude oil, coupled with taxes accounting for more than the base price, means petrol and diesel are at their costliest in more than two years.

Oil retailers started increasing prices from Nov. 20 after a pause of two months. That came as the crude is rose to more than $50 a barrel, gaining19% in the last one month.

Yet, 30-40% of the retail price is linked to benchmark Brent crude. Bulk of what consumers pay at the filling station comprises central and state taxes, and other charges.

For instance, petrol and diesel in Delhi cost Rs 83.71 and Rs 73.87 a litre, respectively, on 14 Dec. 2020. That’s the highest since September 2018. The respective prices on Dec. 1, the latest data for which the breakup is available, was Rs 82.34 and Rs 72.42 a litre.

According to the breakup available on the Indian Oil Corp.’s website, taxes contribute more than 63% of the petrol and 58.6% of the diesel retail price.

High taxes prevented retail prices from falling as much as crude even though prices are market-linked in India. Brent tumbled to $19 a barrel in April from $66 at the start of 2020 as Covid-19 lockdowns triggered economic uncertainty and demand fell. Instead of passing on the benefit to consumers, the government increased central excise duty on petrol and diesel twice—Rs 10 and Rs 13 a litre—in May.

The increase helped the government’s excise revenue to swell to Rs 1.61 lakh crore between April and October 2020, growing 40.9% year-on-year, according to data from Controller General of Accounts. That’s when the government tax revenue declined as the economy contracted. Central taxes are higher than the base price of the crude as of Dec. 1.

Oil Retailers Stand To Gain

For oil marketing companies, the rebound in Brent crude is likely to create inventory gains in the third quarter—by selling inventory purchased inventory bought at a lower price at a higher market price. According to a report by ICICI Securities, further price hikes are required to maintain net marketing margins and compensate for weak gross refining margin. The brokerage estimates the inventory gain at Rs 450-880 crore in the third quarter.



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