Mint Primer: Global crude is at $72. Will petrol prices see a cut?

Crude prices have plummeted 20% since March and are now below $75 per barrel. This has raised hopes of a steep cut in petrol and diesel prices in India, last revised before the general elections. Mint looks at the possibility of a price cut and how it would impact the economy:

How have global crude oil prices done?

Globally, crude has fallen a sharp 19% since April. At $72.48 now, the Indian basket of crude oil is at its lowest since August 2021 when it was $69.8 per barrel. Since the pandemic, when prices slumped to a two-decade low of $19.9 in March 2020, prices have oscillated wildly. Prices crossed $100 per barrel for the first time since 2014 in March 2022 to hit a decadal high of $116 per barrel in June 2022. But it declined thereafter to settle at less than $80 per barrel by the end of fiscal year 2023. In the last fiscal year, prices did shoot to over $90 per barrel in September but were mostly range-bound at around $81-84 per barrel.

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What are the reasons for the decline?

Prices have fallen largely due to reduced demand from China, the world’s largest oil importer. In its monthly report last Tuesday, Opec lowered its global oil demand forecast for the year to 2.03 million barrels per day (bpd) from its earlier estimate of 2.11 million bpd. This was the second consecutive month of downward revision—its original demand projection in July was 2.25 million bpd. ​It also cut its growth estimate for 2025 from 1.78 million bpd to 1.74 million bpd. Geopolitical tensions also have a big impact on oil prices but most of the fears of increased escalation in tensions have been unfounded.

Why have pump prices not changed?

Petrol and diesel prices were deregulated in India in 2010 and 2014, respectively, and till 2017, oil marketing companies changed prices fortnightly. Since then, prices are supposed to be revised daily but that has not happened. On 15 March, petrol and diesel prices were cut by ₹2 per litre each ending a freeze in prices going back to 6 April 2022.

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How likely is a price cut in the future?

Petroleum secretary Pankaj Jain said oil companies would consider a cut in retail prices if global crude remained low for an extended period. Typically, the alignment of low crude prices and any upcoming elections have resulted in a price cut. With elections in Haryana and Jammu & Kashmir due over the next 20 days, to be followed by Maharashtra and Jharkhand later this year, hopes of a steep price cut have gone up. Experts believe there is room for a ₹10 per litre cut in petrol and ₹6-7 per litre cut in diesel.

How will lower oil price impact the economy?

It will reduce operating costs of over 5.8 million diesel-run goods vehicles, 60 million cars and 270 million two-wheelers that largely run on petrol. Cheaper diesel leads to a reduction in transport and logistics costs that lowers inflation as most goods are transported by road. Part of the savings for car and two-wheeler users leads to spending in other sectors of the economy. Lower international price also reflects favourably on India’s current account deficit as more than 85% of the nation’s crude requirement is imported.

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