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Will the OPEC deal bring petrol, diesel prices down?

As of July 20, 2021, petrol and diesel prices did not increase for four consecutive days. This was the longest period without a price increase since May 3.
OPEC is a cartel of 13 countries which produce 29% of the total crude oil in the world.(HT Photo)
Updated on Jul 21, 2021 05:09 PM IST
ByVineet Sachdev

On July 18, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement to increase its crude production by 400,000 barrels per day on a monthly basis till the halted output is fully restored. OPEC is a cartel of 13 countries which produce 29% of the total crude oil in the world. Brent crude prices have fallen sharply after the announcement. Brent Crude closed at $68.62 per barrel on July 19, 6.75% lower than $73.59 on July 16.

As of July 20, 2021, petrol and diesel prices did not increase for four consecutive days. This was the longest period without a price increase since May 3. Petrol and diesel prices changed only twice during the March 27-May 3 period, when assembly elections in Assam, Kerala, Tamil Nadu and West Bengal were being held.

Will the OPEC deal lead to a fall in petrol and diesel prices in India?

Here are four charts that explain this.

Brent crude was falling even before the OPEC deal

Brent crude reached $78.34 per barrel on July 2, 2021. This was the highest price since October 23,2018. It has fallen gradually since then, gained momentum once again and then fallen sharply after the OPEC deal to reach $68.62 per barrel on July 19. An agreement among OPEC members to boost production is not the only factor behind the softening of crude oil prices. A renewed surge in Covid-19 cases in advanced countries and the possibility of re-imposition of restrictions or fall in demand is also a cause. “Oil has run into stiff headwinds in July after rising in seven of the past eight months as the global economy rebounded from the pandemic. The salvaged OPEC+ deal has removed a layer of uncertainty for the market, but the latest Covid-19 resurgence is a reminder that the recovery will be bumpy”, a Bloomberg report said.


Crude production will not reach pre-pandemic levels even after OPEC deal

Data from OPEC’s monthly oil market report shows that world’s total oil production in the quarter ending June 2021 was 88.62 million barrels per day (mbpd). While this is marginally higher than the 86.64 mbpd in the quarter ending June 2020, it is significantly lower than the 93.9 and 91 mbpd produced in the quarters ending June 2019 and June 2018. OPEC’s own production cuts have played a significant role in global production being lower than pre-pandemic levels than that of non-OPEC members.

Will fuel prices in India fall significantly?

Even though crude oil prices have fallen significantly between July 2 and 19; from $ 78.34 to $ 68.62, petrol-diesel prices have not come down significantly in India. In fact they have only gone up except in the last four days. The price of petrol and diesel was 99.16 and 89.18 per litre in Delhi on July 2, 2021. This had increased to 101.84 and 89.87 per litre on July 20, 2021.

Is the government; to be sure, government-owned oil companies, not passing on the benefits of fall in crude price to the consumers? There are two factors worth highlighting here. Brent crude prices do not represent the price of crude oil imports to India. The petroleum ministry releases what is called the price of Crude Oil Basket (COB) for India. On July 19, 2021, India’s COB was $71.2 per barrel, $2.58 more than the $68.62 at which Brent was priced. Then there is also the question of the role of the rupee dollar exchange rate. The average rupee-dollar exchange rate was 73.27 per dollar in May 2021. This had fallen to 74.79 per dollar on July 19, 2021. This means that exchange rate dynamics have neutralised the price of gains from softening of international crude oil prices to some extent.

Tax cuts hold the key to any significant relief in prices

While petrol-diesel prices could ease significantly if crude prices crash from where they are now, it needs to be underlined that tax burden is a major reason for the current level of high petrol-diesel prices in India. Petrol-diesel prices had not reached their current levels even when crude oil prices had crossed the $100 per barrel mark between Feb 2011 and Sep 2014. The total tax component in petrol and diesel prices per litre had increased from 37.77 in April 2020 to 56.33 in July 2021 for petrol and from 28.02 to 44.94 for diesel in Delhi.

The government in its reply to a parliament question on July 19 said that Rs1,01,564 lakh crores have been collected through union excise duty between April and June this year.

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