Many of us started daydreaming when we read that the prices of crude oil worldwide in May 2020 had plunged to zero because sales crashed in the Covid-19 pandemic. We slept happily, imagining that petrol and diesel prices would come down sharply. Instead, we woke up to a nightmare — fuel prices rose sharply as soon as roads were opened. Let us look into the hows and whens of this rude jolt, try and understand the underlying causes and figure out what the future has in store.

OIL INDUSTRY
Petrol pumps are the consumer end of India’s huge oil and natural gas industry. Government of India owned oil companies are the only ones in this industry now. The single important stakeholder (other than us, the consumers) is therefore the government. 
India is one of the world’s biggest oil consumers. The oil industry is crucial to the country’s economy – its share in our nation’s Gross Domestic Product (GDP) is 15% or so. 

Source Petroleum Planning and Analysis Cell (PPAC) Ministry of Petroleum and Natural Gas Govt of India

The industry has three segments:
UPSTREAM – Deals with exploration and production of crude oil. Since India produces a limited amount of crude oil, most of it is imported.
MIDSTREAM – Refers to storage and transportation of Indian or imported crude oil.
DOWNSTREAM – Denotes refining of crude oil followed by storage, transportation and marketing of petrol, diesel etc. via pumps and outlets.
From the above information we can deduce that the price of petrol or diesel should be the cost of crude oil, plus the cost of transporting, storing and refining it, plus the cost of shipment and sale from a pump. Add normal taxes and profits and you will have a fair price. So when crude oil prices crashed, and then inched up to still very low levels of $40 or so a barrel (159 litres), it was shocking to see that the selling price of petrol and diesel shot up steeply and continued to stay there.

Source Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas Govt of India

THE REASON
A lot of taxes are heaped on crude oil (measured in tons) and petrol/ diesel (measured in litres) at every stage, by the government of India. As it controls the right to levy taxes, and also owns the companies operating in all the three segments, the consumer has no alternative but to pay whatever price is being charged.
By a simple calculation, on an average, an Indian motorist pays about double the price of petrol and diesel compared to other countries which also import crude oil, operate their refineries and petrol pumps, and have a stable government. This forces us to take a closer look at the different taxes levied on the crude oil, and on petrol and diesel.

TAXES LEVIED ON CRUDE OIL
Crude oil attracts three taxes under the heads of import duties – basic customs duty, additional customs and NCCD (countervailing duty). In addition, there are three taxes under the excise rules – basic excise duty, cess and NCCD. Over and above, there is a 10% social welfare surcharge.
Branded petrol attracts basic customs duty, along with additional customs duty of CVD and non CVD heads plus SAD (special duty). Under the excise head, a basic excise duty plus special additional excise duty plus road cess/ additional excise duty is added on. On top, a social welfare charge of 3% is payable.
Branded diesel attracts the same eight taxes given above – the rates are more or less than the rates on branded petrol. 
In all, the central government collects more than `1 lakh crore from import of crude oil alone, and more than this sum from sale of petrol and diesel through the retail outlets.
The actual rates of the taxes are quite high and this really multiplies the cost of the fuels for buyers. These taxes disguise the cost of crude oil, and the cost of importing, storing and refining it, and then the following cost of storing, transporting and selling branded petrol and diesel.
Unfortunately, when the crude oil prices crashed, the government did not pass on the lower cost of crude oil to petrol and diesel buyers. Instead, the rate of customs and excise duties were increased again and again to keep to the earlier price levels. It was further increased in the months of June and July 2020.
On top of all these taxes and the soaring price levels of the government of India, the state governments levy their own local taxes and GST. The top five states that collect large tax sums this route are Gujarat, Maharashtra, Haryana, Uttar Pradesh and Tamil Nadu. In total, all the states and Union territories combined collect about Rs. 7,500 crore a year.

Source Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas Govt of India

THE GROUND REALITY
Branded petrol in Kolkata was retailing at `82.02 per litre on July 26, 2020, and branded diesel at `77.04 per litre. This is a lot more than the prevailing prices before the shutdown in end March 2020 when diesel retailed close to `64 and petrol at `72.
As all activities were shut down, there was no change in selling price from April to June 2020 in most parts. Cars weren’t running, truck and bus services were banned and goods vehicles supplying essentials were few and far between. In fact, many pumps found it unviable to be fully staffed even if the outlet was open due to lack of buyers.
The rates of both petrol and diesel started climbing up steadily day on day over the month as government of India owned oil marketing companies (OMCs) in the downstream segment restarted the daily revision of rates. The first round of increases happened from May 5, 2020, but then the curve grew steadily after initial increases. The real rise in prices started from June 7. The prices peaked around the 29th of June and closed the month at around `80 plus for petrol and some rupees less for diesel.
On an average, across the country, the percentage rise in the retail price of petrol was around 12% and for diesel at around 16% over 40 odd days.

Source Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, Govt of India

THE RISK FACTORS
Since India imports most of its crude oil, the biggest risk is the rise in price of crude oil worldwide. The international oil exploration and production (E&P) companies will try to overcome the fall in sales on account of the pandemic by maximising earnings, and working to profit from fluctuations.
While a fresh round of Covid-19 attacks could hit demand, as well as political tensions between the USA and China, the cost of transportation of crude oil may rise because of fears of conflict.
In addition, the countries that produce and export crude oil have an organisation called OPEC. The body has been trying very hard to develop a plan to deliberately lower the production of crude oil. This will push up crude oil prices and limit its supply.
These factors may cause the WTI oil price to fluctuate in a $30-$45 range. OPEC is likely to limit export because of fears that it will take months for oil demand to get back to pre-virus levels.
In India, we are facing a severe recession in the economy following the near two-month lockdown since end March 2020. India’s fuel consumption collapsed by as much as 70% just after the lockdown at one stage.
As the lockdown eases, it’s now running at about 35% below July 2019 levels as on July 2020 and could take until the end of 2020 to get close to full recovery.
This has made the government and its owned petrol and diesel companies most worried. The aim is therefore to maximise revenue. Top officers and executives at the government-owned fuel retailers have been clear on this point. Quoting some of the industry experts, “Demand is reaching 60-70% of normal, but it will take some time to get to pre-Covid sales,” Mukesh Kumar Surana, Chairman, Hindustan Petroleum Corporation, said recently. “Over a period of two to three months, we should get back to 80% of normal sales. Beyond that, it will be slow,” he said.
R. Ramachandran, Director (Refineries), Bharat Petroleum Corporation, India’s second biggest fuel retailer sees fuel demand reaching about 80% of normal by November or December of 2020, according to news reports.
Another industry leader, M. Venkatesh, Managing Director, Mangalore Refinery and Petrochemicals, has said, “People would prefer to use private vehicles rather than public transport.”
Overall, experts say that sales were around 4.6 million barrels a day in May 2019, which fell to about 2.8 million barrels a day in May 2020. As private cars stayed off the roads under the lockdown, petrol sales were down by about 50-60% in June 2020 compared to June 2019. Because goods were transported using diesel, the sales fell less, by around 37-40% in 2020.
Dealers who sell petrol and diesel also want prices to be at a level where it is affordable for the people but not at a level such that their commissions suffer.
According to Ajay Bansal, President, All India Petroleum Dealers Association, “Sales came down to almost zero in April 2020 but since the easing of restrictions, things have started looking up. Normalisation will take a long time.”
The removal of some of the restrictions in certain sectors to boost diesel sales in particular is unlikely. Users are desperate to travel or ship goods and therefore will pay any price for fuel to get to their destination.

Source Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, Govt of India

Inter-state travel is now being allowed with permits, while public transport in some cities is operational. The government’s ministers are univocal in their propaganda that the economy is recovering. They are deeply reluctant to give concessions to fuel buyers and car owners in the form of lower taxes on petrol.
If crude oil prices rise, it would be because in places like China and Dubai, business, leisure and industry would bounce back to normal. The oil exporters are praying for the recovery in Chinese consumption. The first sign of reopening of Chinese factories led to a dramatic upward rise in crude oil prices after the sudden and expected drop in prices to below zero last month, with the type called Brent futures back around $35 a barrel. The biggest producers are therefore sticking to their historic pledge to curtail supplies.
If we analyse the available data before the lockdown, diesel is mainly used in transport and industries and was at that time accounting for 40% of India’s total oil demand.
Diesel sales jumped by 75% in the first half of May 2020 compared with the same period in April 2020. Meanwhile, fears of infection from public transport will have led to more people buying second hand cars, motorbikes and even new cars so that they can travel in safety by avoiding close contact with other people. In every country, people are returning to work using their own cars or taxis and not using public transport.
Truck fleets which account for the majority of diesel consumption in India, are still facing logistic and financial constraints. ‘It is estimated that half of the truck transport sector is not getting any bookings,’ according to the All India Motors Transport Congress, the largest body of transporters in India, representing almost 10 million truckers. Commercial vehicles like trucks, small cargo vehicles and buses account for 80% of India’s diesel consumption. Long-distance travel is at present quite limited because of local lockdowns and interstate border closures between states and districts. As a result, very few people are using their own cars to travel long distance despite the fact that trains are not running normally.
In fact, any reduction or stability in pricing of petrol and diesel is unlikely till roads open up and people feel safe and confident to travel using their own petrol/diesel car. The International Energy Agency has warned that sales of petrol and diesel will come towards normal levels not before the calendar year 2021.
Experts at the Paris-based IEA were quoted as saying that diesel and petrol sales could drop to about 12%. This means lower quantities of crude oil and fuel to tax and a fall in tax revenue for the government.
Hence, the constant increase in taxes to earn more and more from petrol/ diesel sales. And with this mindset, a reduction in selling price appears to be most unlikely.

Source Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, Govt of India

THE IMPACT
The price of each kilogram of rice or sugar depends on the price of the fuel used to take it from the field to factory, for processing and transportation by truck to the local stores for sale. Many economists have warned that the high price of fuel is the biggest problem in the Indian economy because the high taxes are pushing up the cost of everything and sucking out money from people’s pockets. With less money, people are spending less, and this is leading to economic recession.
Therefore, unless petrol and diesel prices are reduced, the economy will not rebound. Even the farmer, who is possibly using a diesel pumpset to water his field, a thresher to process the crop or an old car to accompany the harvest to the market, is hit by high fuel prices. The urban citizen is hit much more directly.
Governments must appreciate that the income from manufacture of components and cars, and taxes from the sale of new cars is one of the major sources of tax revenue, a big segment of employment and of the base of the service industry in this country, from call centres to tourist spots. People have to get to work, safe and comfortable, to make the economy run. 
A highway not used by a large number of motorists eager to travel intrastate or interstate on work, duty or leisure, is a useless asset. The country cannot afford to have loss making, neglected assets because users find fuel too expensive and therefore don’t travel enough to generate the basic revenues from toll charges.
If we look at industry and manufacturing, or at generation of electricity, the use of fuels is all around us. No industry can be viable unless the transportation of raw materials is not costly, and the shipment of produced goods is not too expensive. The cost of moving goods and products can make or break a country’s economy.
By taxing crude oil to death, and then by taxing its processing, and the sale of the final products, the cost of energy has been pushed up in India to levels that threaten to make our service sector and industry unviable. Lower energy cost, at a level that yields profit but does not crush the user, is the way to economic prosperity and growth.
The final problem caused by high prices of fuel is adulteration. Be it diesel used in buses or petrol used in auto rickshaws, adulteration using cheaper, highly polluting products cannot be avoided if prices of the genuine fuel is kept unfairly high. We are all aware of the menace of the locally blended ‘kaanta-tel’ which is a deadly cocktail of petrol and chemicals.
By making motoring unviable and uneconomical through a shortsighted policy of high taxes on petrol and diesel, the entire economy may be under threat or even destroyed.

NOTE:
1. In addition to the above, 10% Social Welfare Surcharge (3% in case of petrol and diesel) is also applicable on the total duties of Customs (excluding CVD in lieu of IGST).
2. In case of ATF, Basic Excise Duty /Additional Customs Duty (CVD) is 2% in place of 11%, for supply to schedule commuter airlines (SCA) from the regional connectivity
3. Basic Customs Duty is Nil for import of domestic LPG sold to household consumers (including NDEC) by PSU OMCs. Basic Customs Duty rate is 5% for other importers of domestic LPG.