Why Does a Drop in Crude Oil Prices Not Translate to Lower Fuel Prices in India?
Introduction
The belief that a drop in international crude oil prices automatically leads to a reduction in fuel prices in India is a misconception. Indian fuel prices are influenced by a complex mix of factors that often include the government's own tax policies, market dynamics, and geopolitical events.
Indian Government's Role and Tax Policies
The claim that the Indian government is simply using international crude prices as an excuse to raise domestic fuel prices has merit. Any decline in international prices is often offset by increased taxation on fuel. This is because the government views taxes on petroleum products as a major source of revenue.
Furthermore, the government's sensitivity to the well-being of the common man is questionable. Despite the essential nature of fuel for transportation, housing, and livelihood, the government does not appear to be as concerned about the rising cost of fuel as it is about the prices of vegetables and other commodities.
The Role of Landed Prices and Market Forces
Crude oil prices at the 'landed' stage – the market price at the supplier's location plus transportation – in India are still high. This is because various forces are not in favor of a drop in prices. OPEC and Russia agreed to cut crude production during the COVID-19 pandemic to maintain international market prices. While this agreement is no longer in effect, other factors still impact the price of crude oil.
Geopolitical Factors and Market Condition
India's inability to import crude from Iran due to international sanctions adds another layer of complexity. geopolitical factors play a significant role in determining the price of crude oil. This is not confined to just India but affects the global market.
Other Commodity Prices and Events
The situation with liquefied natural gas (LNG) exemplifies how market dynamics can drive prices. The recent cold wave in East Asia has led to a surge in demand for gas for heating and electricity. However, the shortage of ships to transport gas has resulted in a perfect storm for LNG prices.
For instance, LNG prices in the global market have surged from record lows to all-time highs in less than a year. The regional price benchmark has risen to 28.221 per million British thermal units from a nadir in the spring of 2020. This is 15 times the price seen when the coronavirus pandemic hit oil and gas demand. In some cases, prices have even surpassed levels indicated by global benchmarks.
The global market still has an ample supply of LNG, but the challenge arises from transportation. Thermal weather in Asia, combined with the backlog at the Panama Canal and strong pandemic-related demand for consumer goods, has created an imbalance in supply and demand.
Conclusion
It is clear that a variety of factors contribute to the stability and fluctuation of fuel prices in India. The government's tax policies, geopolitical events, and market dynamics all play a significant role. While it may be easy to blame the government for not lowering fuel prices when crude oil prices drop, the complexity of the global market cannot be underestimated.
Therefore, the current situation reflects a balance of various forces rather than a single cause-and-effect relationship. Understanding these complexities is essential to comprehending the nuances of fuel pricing in India.