How are fuel prices decided in India? MintGenie explains

Sometimes one might wonder that despite low crude oil costs, why do fuel prices increase? What factors contribute to the price of petrol and diesel and how is it calculated? Read ahead to find out the answer to these questions.

How does fuel reach the final consumer?

The price mechanism of fuel can be better comprehended by understanding the process of how fuel reaches retail customers. In the Indian Oil Market, there is a cartel of three major companies, the Indian Oil Corporation Ltd., Bharat Petroleum Ltd., and Hindustan Petroleum Corporation Ltd — together they have around 90 percent share.

Crude oil, the principal constituent of these fuels is first bought and imported into the country and processed by a corporation. Cost of crude oil, freight cost, and import charges along with customs duty is appended during this course of action. In addition, the charge of processing the crude oil to make a particular fuel called ‘Refinery Transfer Price’ is levied by the corporation.

After the fuel is refined and the final product is ready to be sold in the market, these oil marketing companies sell the fuel to dealers at “depot price”. The depot price also includes added inland freight costs and the margin of the oil corporations.

Final price

Before the final price is calculated for the retail customers, applicable excise duty by the central government, VAT of the concerned state government together with the commission of the dealer are added to the tally. This gives us the retail price.

Why do fuel prices change daily?

The daily revisions in the price of the fuels happen because of the ‘dynamic daily price model’ introduced in 2017 in India. In this model, the crude oil prices are updated daily in tandem with the fluctuations in international crude oil prices. The prices are not regulated by the government unlike in the past.

Since 84% of crude oil in India is imported, retail prices and international crude oil prices are correlated and the former rises with a slight fluctuation in the latter. As the international prices are in dollars, the value of the rupee is also a contributing factor in the calculation of market price.

Since there are multiple factors that contribute to the calculation of fuel prices, no single factor can be attributed for the rise in prices each time. It is possible that more than one factor is responsible for the price fluctuation.