Maha Bharat: Episode 31

Why do petrol prices change almost every day?

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In India, we’re just used to fluctuations in our petrol prices and just when you thought prices couldn’t go any higher, they do. It is true that we pay among the highest prices for petrol in the world, but have you ever stopped to wonder why that is?

This episode takes you through the complicated set of factors that decides the rise and occasional fall in petrol prices in India.

Show Notes

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Links to clips used in this episode —

Full Transcript of Episode 31 –

When you open the newspaper in the morning or watch the news; or even chat with your friend or neighbour: Basically, in most conversations that happen in India, there is one topic that we keep discussing again and again —

Petrol ke daam wapas badh gaye?

For many other everyday things we buy, prices rise and fall over a period of time. From market ki sabzi to the price of a car, you can maybe see a pattern attached to the rise and fall in prices. For example, prices of vegetables change depending on the season.

But over the last few years, petrol and diesel may perhaps be the only commodities whose prices have been changing – Every. Single. Day. (har. Ek. din).

[We hear news clips about the increase in the prices of petrol in major cities]

But it’s not like the prices shoot up every day. On some good days, you will find a decrease in prices, too.

[We hear a news report about a fall in petrol prices]

There are many reasons why petrol and diesel prices keep changing so much. It may be because of the day’s US Dollar rates, or sometimes even depending on the state you live in. The petrol we put into our vehicles makes a long journey before reaching us. The various stops in this journey also determine how its prices rise and fall. 

In today’s episode, I’ll take you through this journey while we try to answer the questions that we’ve so often asked: why do petrol and diesel prices change so much?

Here’s a fact that may be hard to believe: India actually imports very little petrol or diesel. 

Jee haan — most of our petrol and diesel is made right here in our country. Let me explain.

Petrol and diesel are actually products made from crude oil — jisko hindi mein, kaccha tel kehte hai. And it is this crude oil that India imports on a large scale, not petrol. In fact, we import nearly 84% of our crude oil from Iraq, Saudi Arabia, USA and other countries. 

Let me give you an idea about how important crude oil is to us as a country. In 2019, reports said that nearly 30% of all our energy needs comes from crude oil. Today, India is the 3rd largest consumer of oil in the world after USA and China. And if you consider growth in oil consumption, we saw the 2nd largest growth in consumption in 2019. 

Can you imagine how much oil we consume? approximately 52 lakh barrels of oil every single day. And in case you are wondering, one barrel of crude oil means 159 litres of crude oil. So we consumed almost 83 crore litres of crude oil every day last year.

Most of this crude oil is used to make petrol and diesel, but some amount goes into making road tar and motor oils as well. 

In just the month of June this year, India imported 1.3 crore tonnes of crude oil.

But, this might change soon:

[We hear the voice of Prime Minister Narendra Modi speaking about reduction in Crude Oil Import]

This expensive fuel practically runs the country, I told you earlier, that importing crude oil is the first step in manufacturing petrol or diesel. 

What happens next?

Process kuch aisa hai: Crude oil is imported in India by Oil Marketing Companies ya OMCs for example, Indian Oil Corporation or Bharat Petroleum. Sometimes, they also use crude oil manufactured in India. Now these are examples of companies run by the government, but we also have private sector companies like Reliance Industries Ltd, Essar (एस्सार) Oil Ltd and Shell India who do the same thing. 

Now, these companies distribute crude oil to various refineries that they own across the country. There are a total of 23 refineries in India, and 18 of those are public sector companies. Indian Oil Corporation for example, owns 11 refineries in India.

So crude oil reaches these refineries, what happens next? 

In these refineries, various petroleum products, like petrol and diesel, are produced from crude oil. Ab, refining ka simple explanation kuch aisa hai — When crude oil is heated to specific temperature, it separates into different chemical compounds including petrol, diesel, paraffin wax (पैराफिन वैक्स), petroleum jelly, etc. All of these are made from crude oil, but they have different levels of carbon which decides how much energy each by-product can generate. 

Dekha jaye, toh this is the difference between petrol and diesel too. Diesel can generate more energy than petrol. This is why you’ll notice that a car with a diesel engine is more fuel efficient than one with a petrol engine or that diesel is used to drive bigger and more powerful vehicles.

The companies then sell these products to petrol pump dealers across the country who then send it to the final petrol pumps. And this is where you and I get our petrol from. 

The reason I’m telling you this is that every stage of this process determines the price of petrol, and why it changes. 

Today, the price of petrol is approximately ₹80 per litre. It’s hard to imagine that there was a time when the same amount of petrol could be bought at ₹10 in India! 

I’m talking about 30 years ago, in 1990, when the price of petrol was just ₹9.84 per litre. 

Let’s see what has happened since then — and why petrol prices have increased by almost ten times.

Today, oil is traded in the global market like gold. And this makes sense, because when the world discovered petroleum deposits in the earth, it was considered so precious and important that it was called black gold. 

The history of petroleum in India doesn’t go too far back. It was in 1867 that the first oil deposits were discovered in the town of Digboi (डिग्बोई) in Assam. From here, we went on to build big oil companies that are household names today: Indian Oil Corporation, Hindustan Petroleum Corporation Limited, among others. 

Lekin, the story of Digboi itself is quite interesting and even funny. The story is that oil deposits were actually discovered in a small town in Assam while building a railway line. And once the British officers realized that the black liquid on the ground is petroleum, they asked workers to dig for more. As the digging progressed, an English engineer W.L. Lake shouted at a worker in English: “dig, boy, dig!”. This is how the small town got the name “Digboi”. This is a true story!

After India got independence, in the industrial policy of 1954, the government declared that the oil industry would be a core sector industry. Core Sector Industries are industries that have a key impact on our economic activities. We set up the Ministry of Petroleum and Natural Gas and in 1959, the Oil and Natural Gas Commission (ONGC) act was passed in the parliament, which would work for the development of petroleum resources and products. 

A solid plan was in place to boost the oil industry in India so many years ago — and it worked. A number of Oil Marketing Companies were set up, and refineries were built. And yet, even today, India imports more than 80% of its crude oil.

Why?

There are two reasons for this. One is that we do not produce as much crude oil as we need. We produce about 9 lakh barrels of oil everyday, according to the BP report. But like I told you, our daily needs are double that amount. With time, our oil wells have become less productive, and we haven’t made any new oil discoveries. But the second reason is that we actually refine most of our crude oil and export the petrol that comes out of it. In 2019 and 2020, our export was nearly 102 billion dollars. 

The price of crude oil or Kaccha Tel in the global markets is the root of the fluctuation of petrol prices. If there’s a change in the global rate of crude oil, this might affect the prices of petrol in the country.

Like most other commodities, crude oil prices are also mainly decided by the demand and supply of oil in the global market. But there is another factor here that decides and keeps these prices in check. And that is the Organization of Petroleum Exporting Countries, ya OPEC. It consists of 13 countries that make up for almost 44% of the world’s crude oil production. 

OPEC is responsible for controlling the prices of Petrol artificially. Organizations such as these are called Cartels. You might have heard of Cartels in relation to Diamonds. The prices of diamonds, too, are artificially controlled by cartels. 

So, what does OPEC do? Like I told you, the prices of crude oil are actually determined by demand and supply. To control these prices, OPEC changes the demand and supply of petrol. For instance — if OPEC decides to increase supply of oil from a country, then the prices will stabilize. But aisa bhi nahi hai that the OPEC can set any prices it likes. There is something called an OPEC reference basket — yaani, a group of different types of crude oil. The prices set by OPEC are based on the average prices of these oils. OPEC works with the supply of oil, keeping in mind these prices

OPEC’s decisiosn affect the final price of Crude Oil in the global market. 

It’s no surprise then that crude oil prices are closely tracked by citizens like us — much like the stocks of different companies, right?

Chalo crude oil se chalte hai petrol par. After all, you and I don’t buy or exchange crude oil. Our concern is with the prices of petrol, which not only change every day, but have been increasing as of late. Before we see why, let’s take a minute to understand how exactly the price of one litre of petrol is determined

The price of one litre of petrol is made up of several costs – starting from the cost of crude oil to the tax added. So, think of every step as adding a cost to the one litre. All of these stages determine the cost of petrol. Let’s see what they are!

Step one: the price of crude oil. The basis (buniyad) for the price of petrol is the global price of crude oil. Yahi reason hai, ki whenever the prices of crude oil go up or down, you see people worrying that this might affect the prices of the petrol they buy. 

Next are freight charges added to the price of crude oil. Matlab, the cost of transporting crude oil to the oil refineries. This is not just within a country. Crude oil is transported by tankers across countries — and it’s not cheap at all! In march this year, the cost of transporting crude oil from the Gulf to China was 1.3 crore rupees per day!

The next step is refining the oil to make petrol and diesel. The Oil Marketing Companies ya OMCs send the oil to their refineries. 


Now, the OMCs add a certain amount to the price of petrol and diesel to make profits. They then sell it to petrol pump owners, who add their own profit margin to the cost. To this price, the central and the state governments add an excise duty and value added tax. Aur tab jaake, the final price of petrol decide hota hai. 

You may have noticed that this price differs from state to state. This is because different states impose a different amount of tax on petrol. 

So, in theory, the increase or decrease in any one of these factors — like the price of crude oil or the tax imposed — should reflect an increase or decrease in the cost of petrol. 

But that’s not always the case. 

You might remember that earlier this year, the global prices of crude oil took a very serious hit and crude oil prices dropped around the world.

[We hear a news report about a drop in US oil prices]

This happened mainly because of the sudden fall in demand that the Coronavirus lockdown brought. Also, oil suppliers sold their barrels at a lower price, because they feared that storage capacity might run out in May. Altogether, the prices of crude oil shot down to the lowest it had been in 20 years!

Now, you’d think that this would lead to the decrease of petrol prices in India as well. But that was not the case. In fact, the opposite happened. 

[We hear a news report about the increase in petrol prices]

19 days — the cost of petrol increased everyday for 19 days in a row in June. But if the global costs of crude oil went down, then why not petrol and diesel prices in our country?

First of all, the global prices for crude oil also face fluctuations (upar-neech) very frequently. While it did fall to zero in the USA, the prices increased soon after. But still, it’s not the crude oil that’s making the changes here. It’s the government and the Oil Marketing Companies. 

Our government has a price de-control policy when it comes to fuel. What this means is: the Oil Marketing Companies which distribute fuel to dealers across the country have the freedom to set and change prices without interference from the government. When the pandemic led to national lockdown in the country in March, the demand for fuel obviously went down. After all, no one was even heading out of their homes, let alone driving and refilling petrol. In these months, Bharat Petroleum and Hindustan Petroleum admitted that the sale of their petrol and diesel went down by 55%! 

Remember the tax stage of petrol? Well, in March, the central government also increased the excise duty on petrol and diesel by ₹3 per litre. Only two months later, the excise increased by ₹10 on petrol and ₹13 on diesel!

But if you remember, the prices of petrol didn’t go up in March. This is because the demand for petrol was already low. In this situation, if prices of petrol were increased further, then it would lead to even lower sales.

With this in mind, the OMCs absorbed the hike in excise (OMCs ne yeh keemat khud utha li) and sold petrol to us at the same rate. 

And they continued to make losses.

When the Crude Oil prices dropped in the next few months, it was at the same time that the country was opening up after the first lockdown and the demand for petrol and diesel was slowly rising back up. So, the OMCs took this opportunity to increase the price of petrol to make up for the losses they had borne in the previous months. This is why the price of petrol increased in June, despite low prices of crude oil. 

The prices of petrol and diesel are determined by a fixed chain. But clearly, the parts of this chain are not always dependent on each other. Like we saw, a decrease in crude oil prices won’t always lead to a decrease in petrol prices. Economic and social conditions of our country also play a role as external factors. And these external factors are not limited to our country — even the exchange rate of the US dollar has a role to play in the price of petrol.

The value of rupee against the dollar keeps changing, as we know. Oil Manufacturing Companies import crude oil and pay for it in US dollars. But when the value of the rupee falls, the companies have to pay more money to match the dollar price. When this happens, they increase the price at which they sell the petrol, too. In June, the rupee was weak against the dollar, and this only added to the price increase. 

Oil, tax, dollar — and even the coronavirus: these are all factors that affect and ultimately, decide the price of petrol. 

Remember in the very beginning, when we wondered how petrol was priced at ₹10 in the 90s? — and why its price is ten times higher now? These factors are also the answer to that question. 

Over the years, the prices of crude oil and the value of the US dollar has only increased. Central governments have come and gone, but for every government, the excise duty on petrol has been a major source of revenue. So, this duty has steadily increased. 

And of course, with the rising number of vehicles on the street, the demand for fuel has touched the sky.

Now we know what factors decide the price of petrol — and why it increases or decreases. 

But the question remains: why does it change every day?

The answer is simple: one, because the factors involved in pricing the petrol change daily and two — the government has decided to show us the changes every day.

Doston, the selling and purchasing of crude oil is not an occasional event. It happens every single day. And just like prices of stocks in the stock market go up and down every day, the price of crude oil changes every day. This depends on demand and supply, on prediction and even on sale of future oil! As a result, the price of petrol in India also changes every day. 

But before 2017, we didn’t realize this change. 

Let’s go back a few years. 

From 1975 to nearly 2002, the government imposed the “Administered Price Mechanism” system for the pricing of fuel. Simple words mein kahe toh, the government pre-determined the prices of petrol. At different intervals, it increased or decreased the price. In this case, the OMCs always had a fixed return on their sales. In 2002, the government began small deregulation activities, where market forces affected the price of petrol. 

In 2010, the government finally liberalized petroleum. The price was now determined by international forces. And this meant that the prices would fluctuate more often. The government imposed a fuel price revision system where the price was revised every 15 days. This was usually on the 1st and 16th of every month. All the changes in the crude oil price, and if there were any changes in the dollar value or tax, would add up and be published on these dates. 

On June 16, 2017,  the Government introduced dynamic fuel pricing. This means, the fuel prices would be revised every single day, at 6 AM. Now, even the most minute (chhote-se-chhota) changes were reflected in the petrol prices. Some days, the changes are a few paise up and down, and sometimes there are no changes at all. 

And this is why the prices of petrol and diesel change every single day.

In general, the benefits to this system are that we the consumers, bear small changes every day, instead of a sudden change every two weeks. This makes the system transparent — matlab, we the consumers can see for ourselves and keep track of the ups and downs of the market every day. 

This is a system that’s used in many developed countries, like the US and Australia. In the past, such a system has attracted private fuel companies to participate in the game. Experts believe that in India, this has the potential to welcome more private players, who will bring with them modern technology, more investment and better environmental policies.

You might remember that when this system was implemented in 2017, suddenly, the prices of petrol increased quite a bit. At this time, the crude oil prices were also decreasing. With the new dynamic pricing in place, many of us wondered: is the new system causing this increase in prices?

Some news channels talked about it too, in quite a dramatic manner if I may add. 

[We hear a news report about the increasing petrol and diesel prices]

But doston, while petrol and diesel prices did rise during this time, it was not the Dynamic Pricing at fault. In an analysis of the prices and OMCs, India TV found that it was the rising taxes and increased profit margins of the OMC that led to the increased prices. Another report states that the world market took a hit during this time due to Hurricane Irma (इरमा) and Harvey (हार्वी), which also affected fuel prices. 

I can safely tell you that while petrol prices do change — and often, increase every day, it’s not the dynamic fuel pricing system that causes it. It’s just that we can notice the change on a daily basis now!

However, this does not mean that this is a flawless system. When the prices change everyday, the updated prices are automatically transferred to automated petrol pumps every day at 6 AM. But according to a study from the International Journal of Management Studies — of the 58,000 petrol pumps in our country, only 20% are automated.  The rest have to update the numbers manually every day. And you can imagine that this often causes errors and delays at the petrol pumps. 

The other disadvantage lies in the external factors. Previously, if an international calamity of conflict happened, its effects on fuel prices were not seen immediately. In the 15-day gap, the price often became balanced. But now, any external factor and its effects will change the petrol and diesel price every day.

The price of petrol and diesel affects many of us directly. A change in the price every day means that it becomes all the more important for us to keep track of these prices. We now know that so many external factors affect these prices — and they are completely out of our hands. But the dynamic fuel pricing system can help us track these changes and perhaps understand these factors better. It may even help us make better decisions when it comes to buying fuel!

That’s it from my side for today! Next week, the petrol price will have changed many times — and I’ll be back with a new episode of Maha Bharat!

Credits

Narrated by – Dhruv Rathee
Producer – Gaurav Vaz
Written by – Anushka Mukherjee and Gaurav Vaz
Edited by – Medha V
Title Track Design – Abhijith Nath
Audio Production – Madhav Ayachit