Why Fuel Price Spikes – Predictions for 2021?
|The national average price for gasoline is a nickel more than last week, but is still cheaper year-over-year by 17 cents. Photo: AAA.|
Oil marketing companies raised the pump price of diesel by a high level of 29 paise litre and petrol by another 26 paise per litre in Delhi. With this increase, petrol is now priced at Rs 88.99 a litre and diesel Rs 79.35 a litre in the national capital, according to TimesofIndia.
In the last seven days, the price has gone up by Rs 2.06 per litre for petrol while the diesel rate has risen by Rs 2.56 a litre.
The increase on Monday has followed the firming global oil prices (both product and crude) that have maintained a record streak of gains in the past few days with crude reaching close to $64.5 a barrel mark (single day gain over 2 per cent).
Why fuel price spikes in India?
Retail prices of automobile fuels have reached record highs across the country. Petrol and diesel are taxed heavily in India, and oil price decontrol is a one-way street — the consumer never benefits, India express reported.
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.
Brent crude, which was trading at about $40 per barrel between June and October, started rising in November, and has gone past the $60 per barrel mark as the global rollout of Covid-19 vaccines gathers pace.
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.
How does this situation compare with other countries?
While the price of petrol is just hitting pre-pandemic levels in other countries, India has been seeing record high prices since January due to high state and central taxes. The average price of petrol in India (Delhi) in January was up 13.6 per cent compared to the year-ago period, even as the average price of Brent crude was down about 14 per cent in the same period. Consumers in the US, China, and Brazil paid average prices in January that were 7.5 per cent, 5.5 per cent, and 20.6 per cent lower than the year-ago period.
Petroleum Minister Dharmendra Pradhan said it was a misnomer to campaign in such a way that fuel prices are at an all-time high in the country. Fuel prices are determined by international mechanism, Pradhan said.
The minister said the centre has raised the excise duty and states hiked value-added tax (VAT). He noted that the central government has also reduced prices.
|An employee of a petrol pump seen at work amid the lockdown at Nizamuddin, New Delhi, 2020 (Chandradeep Kumar).|
Pradhan said international crude oil price is an indicator but international product price is the benchmark, according to India.
“In our country state governments and the union government are careful about their tax collection because everybody has their own welfare commitment, developmental priorities for that they need some resources from this route… Petroleum price tax collection is a proven and substantial collection for state governments, the union government,” Pradhan said.
The minister informed the House that prices of petrol and diesel have been made market-determined in June 2010 and October 2014, respectively. Since then, the Public Sector Oil Marketing Companies (OMCs) have taken appropriate decisions on pricing of petrol and diesel in line with international product prices and other market conditions.
Predictions of fuel price in 2021
Oil prices will average just above $50/b in 2021, a more than 21% rise from 2020's depressed level, as the rollout of vaccines and fiscal stimulus programs will help the global economy post a stronger-than-expected recovery from the pandemic, the International Monetary Fund said in an updated forecast.
The IMF now expects global GDP to grow 5.5% in 2021, after a 3.5% contraction in 2020. The 2020 figure has been revised up 0.9 percentage point from the previous forecast issued in October, while the 2021 estimate is a 0.3 percentage point upward revision.
The IMF said advanced economies are projected to recover more quickly than developing countries due to quicker access to vaccines and broader fiscal measures.
"Oil exporters and tourism-based economies face particularly difficult prospects given the subdued outlook for oil prices and expected slow normalization of cross-border travel," it said.
The IMF uses a simple average of prices of Brent, Dubai and WTI to calculate its oil prices. With that methodology, the IMF said oil prices averaged $41.29/b in 2020 and would rise to $50.03/b in 2021, before falling back to $48.82/b in 2022.
The October forecast had estimated that oil prices would average $46.70/b in 2021.
"Non-oil commodity prices are also expected to increase with those of metals, in particular, projected to accelerate strongly in 2021," the IMF said.
The fund said its forecasts were subject to significant uncertainty, with the pandemic yet to be contained.
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