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Why prices of Petrol and Diesel are rising?

Topics Covered: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Why prices of Petrol and Diesel are rising?


Context:

Retail prices of automobile fuels have reached record highs across the country.

How retail prices are linked to crude oil prices?

Retail petrol and diesel prices are in theory decontrolled or linked to global crude oil prices. Which means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.

But, why is it not happening so?

By sharply hiking excise duty as global oil prices fell, the government has practically controlled the price of the auto fuels, mopping up any savings that may have accrued to consumers owing to low global prices.

  • The government does this to boost revenues.

Implications for OmCs and consumers:

Oil Marketing Companies (OMCs) are free to set prices for petrol and diesel based on international prices on paper. Increase in central levies has meant that the consumer hasn’t benefited from low international prices and has ended up bearing the cost of rising crude oil prices.

  • The urban population would be more impacted by rising fuel prices than the rural population however, a weak monsoon may lead to rural India being hit as farmers are forced to rely more on diesel-powered irrigation.

Why crude oil prices are rising now?

  • Prices collapsed in April 2020 after the pandemic spread around the world, and demand fell away. But as economies have reduced travel restrictions and factory output has picked up, global demand has improved, and prices have been recovering.
  • The controlled production of crude amid rising demand has been another key factor in boosting oil prices, with Saudi Arabia voluntarily cutting its daily output by 1 million barrels per day to 8.125 million barrels per day through February and March.

Sources: Indian Express.

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