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Why is petrol price at a historic high, when crude oil is at 18-month low?


 Why pay more for petrol when crude is at 18-month low?
Crude Oil (Brent crude) has touched an 18-month low, and since we use crude oil to refine it into petrol, we should also have lower petrol prices. However, petrol prices in India are at a historic high.

The fact remains that there are three variables when it comes to petrol prices - the first is crude prices, the second is the rupee movement against the dollar and third are taxes. Now, while crude prices have hit a 18 month low, taxes have stayed constant, while the rupee has dropped against the dollar. So, the real culprit for higher petrol prices at the bunk is the falling rupee.


Last year around the same time, the rupee was trading around Rs 48. Today, it is trading at Rs 57.14. This means that a barrel of oil, which has to be paid in dollars has to be paid for at Rs 57.14 to the dollar and not Rs 48. It's unfortunate that the fall in crude prices has coincided with a fall in the value of the rupee against the dollar, negating all benefits of falling crude.

Another major factor in determining petrol prices is taxes. Central and state taxes determine the cost of petrol prices at the bunk.

For example, the central government levies a specific excise duty of Rs 14.35 a litre and 3% education cess to garner Rs 14.78 from consumers. Then states levy VAT on petrol, which is extremely high in states like Karnataka and low in states like Puducherry.

The state government's are unlikely to forego their revenue by reducing VAT, if the oil marketing companies hike petrol prices. Ditto for the central government.

This means that unless the rupee appreciates and crude stays still, individuals can continue to pay a higher price for petrol.


As for diesel, LPG and kerosene they are not aligned to market rates, so the variables really don't matter, since the government has fixed the rates and bears the losses on behalf of consumers.

Read more about: crude oil diesel lpg
Story first published: Wednesday, June 27, 2012, 11:27 [IST]
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