E-Paper
2020-21: A year of great volatility in oil prices
Since both the Central and state governments increased taxes on petrol and diesel, Indian consumers did not experience the gains of fall in international petroleum prices in 2020-21
The year 2020-21 was amongst the most volatile years for international crude oil prices. Both crude oil demand as well as prices fell sharply during the initial months of the year with lockdowns and travel restrictions in different parts of the world.
Oil prices crashed to such an extent that the price of May futures contract for WTI crude, the benchmark for US crude oil, turned negative on April 21. This happened because investors holding such contracts did not want to take delivery and thus incur storage costs.
With the roll-out of vaccine across the world as well as production cuts announced by oil producer cartel OPEC+, international crude prices have revived and are near pre-pandemic levels as seen in December 2019.
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But since both the Central and state governments increased taxes on petrol and diesel, Indian consumers did not experience the gains of fall in international petroleum prices in 2020-21. With current retail prices of petrol and diesel at record levels, here are three charts which summarise the developments in petroleum prices in 2020-21.
2020-21 was a year of sharp fall in petroleum prices
Brent crude prices, which are the international benchmark for petroleum prices across the world, fell to $9.12 per barrel on April 21 2020, the lowest since December 10, 1998. India’s Crude Oil Basket (COB) reached $19.90 per barrel in April 2020, the lowest since February 2002. For the eleven months of fiscal year 2020-21 (data for March 2021 is still not out), average annual price of India’s COB was $42.72 per barrel. This is 30% less than the average COB price in 2019-20 and the lowest since 2004-05.
Who gained from this fall?
The Indian consumer did not. The government enjoyed a windfall gain in taxes. The pandemic’s economic disruption led to a sharp fall in the tax collections of the government from regular sources. To make up for this loss, the government, both Centre and states, did not pass on the benefits of cheap crude to customers and sharply increased taxes on petrol and diesel.
Disaggregated data on the various components of the price of petrol and diesel in the country provided by petroleum ministry shows that the tax component of both petrol and diesel prices increased significantly in 2020-21. Government taxes accounted for ₹37.8 and ₹28 per litre in petrol and diesel prices, respectively, on April 1, 2020. This increased to ₹53.94 and ₹43.74 by March 16, 2021 respectively, the latest data available.
As a result of this, the Union excise duties collection (bulk of which primarily are from taxes on petrol and diesel) for 2020-21, as per revised estimates, has increased by around 35% from its initial budget estimate to ₹3.6 lakh crore as per the latest budget documents.
Can consumers expect any relief in fuel prices in next year?
In its latest short term energy outlook report released in March 2021, the US Energy Information Administration (EIA) has estimated Brent price to hover around $60.67 per barrel during 2021. Brent crude was priced over $64 per barrel on March 30, 2021. In the first week of March, Goldman Sachs estimated Brent crude oil price to reach $75 by middle of 2021 after OPEC and its allies kept their oil production cut deal unchanged and agreed to extend most production cuts until April.
Given the fact that the 2021-22 Budget has targeted a significantly higher level of Union excise duty collections than 2019-20, and the petroleum minister has declared in the Rajya Sabha that the government does not plan to reduce duties on petrol and diesel, any increase in crude prices will only increase petrol-diesel prices further. The government, for its part, has blamed the continuing production cut by OPEC+ cartel as the biggest reason for rise in petroleum prices.
