Just before the festive season in India, worrying news has emerged. Yes, in early September, international crude oil prices were falling rapidly, raising hopes for a decrease in long-stable petrol and diesel prices in the country. However, the escalating conflict between Israel and Iran seems to be dashing these hopes. The impact is already visible with crude oil prices reaching $75 per barrel again. If this trend continues, consumers could face a harsh blow during the festivals. Let’s understand how a $1 rise in crude prices affects petrol and diesel rates.
Iran Launches 180 Missiles, Crude Prices Surge
The Israel-Iran war doesn’t seem to be ending anytime soon. On one hand, Iran launched an intense attack on Israel with about 180 missiles, and on Tuesday, Israel declared that they would respond to Iran's assault, saying their plan is ready but will be executed at a time and place of their choosing. The escalating tensions are directly affecting international crude prices, which have spiked by around 5%.
Source: aajtak
According to reports, the heightened tensions between Israel and Iran have led to a sudden 5% spike in West Texas Intermediate (WTI) crude prices. Previously, it had slid by about 2.7%. Additionally, Brent crude prices have once again reached $75 per barrel. It's worth noting that crude prices soared after the Russia-Ukraine war began.
Petrol-Diesel Price Drop Expectations Hit a Snag!
At the beginning of September, crude prices were consistently falling in the international market. By mid-month, WTI crude prices had dropped below $70 per barrel, reaching $69.27 per barrel, and for the first time since 2021, Brent crude prices also fell to around $70 per barrel. This drop in crude prices followed the European Central Bank’s policy rate cut by 25 basis points. Several other factors also contributed to the decline.
The fall in crude oil prices in September had raised the expectation of a reduction in long-stable petrol and diesel prices in India during the festive season. Reports in Business Today had hinted that the central government might cut petrol and diesel prices in response to the falling crude prices, citing sources within the government.
Impact of Crude Prices on Petrol and Diesel
It’s crucial to understand how increased tension in the Middle East affects international crude prices and, subsequently, petrol and diesel prices in India. Fuel prices in the country depend on several factors and can fluctuate daily. These prices vary from city to city due to factors like international Brent crude oil prices, excise duty levied in India, and VAT imposed by states.
However, the most significant factor in determining petrol and diesel prices is the global market’s Brent crude prices. If crude prices fall, petrol and diesel prices tend to decrease as well. But it’s not always guaranteed that reduced crude oil prices will lead to cheaper petrol and diesel, though it usually does in most cases.
Source: aajtak
Calculation of $1 Increase in Crude Prices
Experts, like Anuj Gupta, suggest that if international crude oil prices increase by $1 per barrel, petrol and diesel prices in India are likely to rise by 50 to 60 paise. Conversely, if crude prices drop by $1, petrol and diesel prices could reduce by a similar amount. Given the sharp recent rise in crude oil prices and the escalating Israel-Iran conflict, the chances of a price cut in petrol and diesel during the festive season appear slim.
India's 80% Crude Oil Import
Reports indicate that India consumes about 3.7 million barrels of crude oil daily, and the country imports nearly 80% of its crude oil requirements. Oil marketing companies in India determine petrol and diesel prices based on crude oil costs, freight charges, and refinery costs. Additional factors such as excise duty, VAT, and dealer commission are added before the final price reaches consumers. Therefore, the ultimate decision on when and by how much to alter petrol and diesel prices lies with local oil companies.
Iran's Dominance in the Crude Sector
Iran, being a member of OPEC, wields significant influence in the crude oil sector. Its involvement in the crude oil market raises concerns about disruptions in the oil supply chain, as Iran accounts for about one-third of the global oil supply. Business Today reports that the threat of further crisis due to Iran’s missile attack could lead to a sharp increase in crude oil prices.
