Fuel costlier by Rs 3 per litre: Why government raised petrol, diesel prices

The government and state-run oil companies raised petrol and diesel prices by Rs 3 per litre on Friday after keeping rates unchanged for weeks.

In Short

• Govt hikes petrol and diesel prices by Rs 3 per litre after weeks of stability
• West Asia conflict and supply disruptions drive sharp crude oil price rise
• Future fuel price moves depend on West Asia tensions and crude price trends

After weeks of holding prices steady despite rising global crude oil rates, the government and state-run oil companies finally increased petrol and diesel prices by Rs 3 per litre on Friday.

The move comes as a combination of global and domestic pressures made it increasingly difficult for oil companies to continue absorbing losses.

India Today had earlier reported that after gold prices turned expensive due to higher import duties and rising global uncertainty, petrol and diesel could be the next major concern for consumers as elevated crude oil prices, rupee weakness and the West Asia conflict increased pressure on India’s fuel import bill.

The reasons behind the fuel price hike are closely linked to the ongoing West Asia conflict, disruptions in global oil supply and the weakening rupee.

WEST ASIA WAR FALLOUT

The biggest trigger behind the fuel price hike has been the ongoing conflict in West Asia.

Tensions in the region have created uncertainty in global oil markets because West Asia remains one of the world’s largest crude oil-producing regions.

As fears of supply disruptions increased, crude oil prices jumped sharply over the past few weeks.

India, which imports nearly 85% of its crude oil needs, is highly vulnerable to such global shocks.

The crude basket India imports has climbed from around USD 69 per barrel before the conflict escalated to nearly USD 113–114 per barrel recently.

Even on Friday, crude oil prices remained elevated. Brent crude was trading at USD 107.20 per barrel, up 1.40%, while WTI crude rose 1.42% to USD 102.66 per barrel.

That sharp rise directly increased the cost of fuel imports for India.

GLOBAL OIL SUPPLY SHORTAGE

The war has also triggered fears of a global oil supply shortage.

Markets have been worried that if tensions worsen further, oil shipments from the region could slow down significantly, reducing global availability of crude oil.

Whenever supply fears rise globally, crude prices usually move up rapidly because countries begin competing for available cargoes.

This has pushed energy costs higher for importing nations like India.

VESSELS STUCK NEAR STRAIT OF HORMUZ

Another major concern has been disruptions near the Strait of Hormuz, one of the world’s busiest oil shipping routes.

A large share of global crude oil shipments passes through this narrow route connecting the Persian Gulf to global markets.

Reports of tensions, attacks and disruptions around the area have created delays and uncertainty in oil transportation.

Any slowdown around the Strait of Hormuz impacts global oil movement and increases transportation and insurance costs for crude shipments.

HIGHER REFINING COSTS

Oil companies are not only paying more for crude oil itself, but are also facing higher refining and operational costs.

As crude prices rise sharply, refining fuel becomes more expensive. Companies also face higher freight, logistics and insurance expenses during geopolitical crises.

State-run oil marketing companies had reportedly been absorbing part of these rising costs for nearly 11 weeks to avoid burdening consumers immediately.

But with crude prices staying elevated for a prolonged period, continuing to hold retail fuel prices became financially difficult.

CURRENCY FLUCTUATIONS IMPACTING IMPORTS

The weakening rupee has added another layer of pressure.

Crude oil is bought globally in US dollars. So when the rupee weakens against the dollar, India has to pay more even if oil prices remain unchanged.

The rupee has been sliding to record lows in recent sessions and is expected to remain under pressure because of rising US Treasury yields, strong dollar demand and expensive crude oil imports.

The rupee settled at 95.7625 against the US dollar on Thursday after hitting a lifetime low of 95.9575 during the session.

The rupee has now weakened for three straight sessions and has lost 1.36% this week alone.

This combination of:

• expensive crude oil,
• shipping disruptions,
• refining costs,
• and rupee weakness

GOVERNMENT HAD ALREADY STARTED SIGNALING CONCERN

Over the past few weeks, the government had already started indicating concern over rising energy costs.

Prime Minister Narendra Modi had urged citizens to conserve fuel, avoid unnecessary fuel usage and even reduce gold purchases to help save foreign exchange.

At the same time, the RBI Governor and IMF had also warned that if crude oil prices remained elevated for a longer period, fuel price hikes in India could become unavoidable.

Economists had earlier told India Today that petrol and diesel price hikes were becoming increasingly likely if Brent crude remained above USD 100 per barrel.

WHY THE HIKE WAS LIMITED TO RS 3

Despite the increase, industry sources quoted by PTI said the Rs 3 hike still covers only a part of the actual pressure caused by rising crude oil prices.

Oil companies are believed to still be absorbing a portion of the cost burden instead of fully passing it on to consumers.

Much will now depend on how the West Asia conflict develops and whether global crude oil prices cool down.

If tensions ease and oil supply stabilises, pressure on fuel prices could reduce.

But if disruptions continue around key oil routes like the Strait of Hormuz and crude prices remain elevated, economists say fuel prices may continue facing upward pressure.

- Ends