Why Are the Fuel Prices So High? And What Do Oil Bonds Have to Do With It?

fuel price

At this point of time, everyone is probably struggling to get their vehicles’ petrol tanks full. The rising oil prices have made it impossible for a lower middle guy to afford a sports bike. I myself own a Royal Enfield Classic 350, the mileage of my bike is only 30 kilometres per litre and with the petrol prices at about Rs100 per litre in my city, on an average, I have to spend Rs 150 daily for petrol. That is a big expense for a guy not living in his hometown and surviving only on freelancing. This story is not just mine, but every other lower middle class person will narrate you a similar agony. I still remember the 90s when I used to saddle back on my dada ji’s scooter, the prices at that time were 30 to 40 rupees per litre, I am not saying that the prices should still be the same, it’s obvious that inflation has grown and so have the oil prices, but pricing above Rs 100 per litre is not acceptable at all. This is the first in Indian history that the oil prices have crossed the century.

Where the petrol prices are agonising the common working class people, the diesel prices are a nightmare for the farmer community. Diesel prices also increase the overall inflation in the daily life goods, as diesel prices rise so do the transportation costs of goods.

Global oil prices have been fluctuating over the past two weeks after a deal was finalised between OPEC+ nations to increase oil production and supply. Weak economic data from China and the US had weakened global oil prices on Monday, but benchmark Brent Crude oil still remains above $72 per barrel. Domestic diesel and petrol prices have also remained unchanged as a result. While fuel prices were expected to come down in July, a sudden rise in crude oil prices stopped OMCs from lowering rates. At the moment, both petrol and diesel are retailing at record high levels in the country. In Delhi, the price of petrol is Rs 101.84 per litre and nearly Rs 108 in Mumbai. The price in Kolkata and Chennai remains above Rs 102 per litre.

Fuel prices are unlikely to reduce anytime soon as the government has already said that it will not reduce excise duty on petrol and diesel. While the government is aware of the burden on citizens due to high fuel prices, it has justified the excise duty on petrol and diesel by citing higher expenditure incurred on vaccinating people against Covid-19 and additional relief measures.

But all this is very common information. Do you know what oil bonds are? Do you know why oil prices actually rise? Do you know if the government can really manipulate oil prices at will? If you don’t, now you will:

There are mainly 4 factors that affect the rising fuel prices:

  1. Crude oil, freight and processing charges to the dealer.
  2. Excise duty charged by the government.
  3. Dealer commission to the gas station.
  4. Value Added Tax (VAT) levied by the State Governments.

Can the government decrease the prices in future?

  1. Ratings agency ICRA (Investment Information and Credit Rating Agency) recently postulated that the government had room to cut cess levies on retail prices of petrol and diesel, thereby easing prices.
  2. Lower fuel prices will likely help cool inflation levels, which are currently beyond the 6% upper limit specified by the Reserve Bank of India (RBI).
  3. The ICRA anticipates an increase in the mobility of the population and economic recovery after easing of curbs and accelerating pace of COVID-19 vaccinations.
  4. It forecasts that consumption of petrol and diesel will hence grow at about 14% and 10%, respectively, in the financial year 2021-22 (from the low base in a national lockdown – hit 2020-21).
  5. The agency projects the aggregate revenue from such taxes on these two fuels to expand by about 13% in FY22 from the previous year, assuming that the total cesses on unbranded petrol and diesel remain unchanged at Rs 32.9 per litre and Rs 31.8 per litre respectively.
  6. That is, the forecast government revenue from the cesses imposed on the two fuels is Rs 3.6 lakh crore this fiscal, or about Rs 40,000 crore more than in the last financial year.
  7. The ICRA argues that if the government decides to forgo the additional revenue that could accrue with higher fuel consumption, it would be able to cut up to Rs 4.50 per litre for petrol and diesel each.

How much taxes do we pay on a litre of petrol?

  1. As of June this year, taxes accounted for close to 58% of the price of petrol in Delhi.
  2. Between May  2014 and June 2021, the centre’s share of taxes on the retail price of petrol rose 216%, even though the base price of fuel declined by 24%.
  3. If one had bought a litre in New Delhi for Rs 94.49 on June 1, 2021 (as per petroleum planning and analysis cell) Rs 32.90 would have been accrued to the centre as tax.
  4. Compare this with the centre’s tax of Rs 10.39 when the total price of the fuel was Rs 74.41 per litre in May 2014.
  5. In it’s June analysis, the ICRA highlighted that the current fuel prices reflect the higher cesses that have been imposed by the centre since March 2020 and an increase in Value Added Tax (VAT) rates by more than three – fourths of the State Governments.
  6. Despite the U.S. dollar price of the Indian crude oil basket being at similar levels (about $72 on average in June in Indian basket terms) at these two points in time.

What are oil bonds?

  1. Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.
  2. These bonds are typically of a long-term tenure like 15 to 20 years and oil companies are paid interest.
  3. Before the complete deregulation on petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.
  4. This ‘under recovery’ is typically compensated through fuel subsidies allocated in the Union budget. However, between 2005 and 2010, the UPA government issued oil bonds to the companies amounting to Rs 1.4 lakh crore to compensate them for these losses.

Would reduction in cesses affect the government’s ability?

  1. ICRA has estimated that the centre needs Rs 20,000 crore in the current financial year to service the interest and principal related to special oil bonds issued to oil marketing companies (OMCs) in the period 2005-2010.
  2. If this debt servicing obligation is to be offset through additional revenues collected from fuel cesses, then the potential duty cut could be to the tune of Rs 2 per litre for both fuels, it said.
  3. The government has serviced interest of close to Rs 10,000 crore related to the oil bonds in each of the financial years FY20 and FY21.
  4. The total current outstanding is about Rs 1.30 lakh crore, out of which Rs 10,000 crore principal and an equal amount as interest is payable this year.
  5. These bonds are interest bearing, having a fixed coupon rate and paid on a half yearly basis. The annual interest due of around Rs 10,000 crore has been provided for in the budget.

So, as we can see there is a lot that the government has to pay but then also if the government follows the suggestion of ICRA about forgoing the VAT and Excise duty that it is receiving due to additional mobility then also the prices of both petrol and diesel will fall by about Rs 4.50 per litre. Now everything is up to the government and its will.

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