Correlation between crude oil prices and petrol price

in India
February 26, 2011 by businessbaatein

In the US, where gas prices are completely deregulated, when international crude oil prices
go up, the gas prices at the stations also go up. Although it is not immediate and not exact.
There are also local and company level variations. A look at the graph of prices in the US for
the last 3 years indicate this. In July 2008, when the crude prices touched a high of US $ 147
per barrel  the Gas price at the stations peaked at US $ 4.12 per gallon. ( 1 gallon = 3.78
litres). In Dec 2008, the crude oil prices came down to US $ 32 per gallon, the gas price at the
stations also came down to 1.61 $ per gallon. When the crude climbed back again in May
2009 to nearly 70 $ per barrel, the gas price at the stations climbed upto 2.5 $ per gallon.
Now that the crude prices have climbed up again to over 100 $ per barrel, the gas prices at the
stations is nearly 3.5 $ per gallon. One analyst on BBC mentioned that the rule of thumb in
the US is for every increase of 10 $ in the price of crude over a 3-6 months period, the gas
prices at the station increases by 25 cents per gallon.

In India, where the petroleum prices are still largely regulated it is difficult to come up with
such a thumb rule. Also, the crude oil cost is only about 45 % of the petroleum price at the
petrol pump as this blogger mentions. Rest being made up of other costs.

If the price of petrol stands at Rs 58.90, the break up of cost as calculated by the Indian
Government is as follows:

 Basic Price: Rs 28.93

 Education Tax: Rs 0.43
 Dealer commission: Rs 1.05
 Excise duty: Rs 14.35
 VAT: Rs 5.5
 Petrol Custom: Rs 1.54
 Crude Oil Custom duty: Rs 1.1
 Transportation Charge: Rs 6.00
 Total price: Rs 58.90

Yet, India imports 80 % of our oil requirements. So when the crude oil price increases the
price increase has to be passed on to the consumer/ taxpayer sooner or later.

Business Standard reports that

The Indian crude basket averaged around $99.85 per barrel in February so far, a rise of
over 6 per cent, compared with January’s average of $93.87. The current quarter average, at
$96.43, rose 13 per cent, from $85.06 in the previous quarter. The current year’s average
price stands at $82.07 per barrel, up over 17 per cent from last financial year’s average of
$69.76.

In January 2011, there was a price increase of Rs 2.50 to Rs 2.54 per litre of petrol. ( 4.5 %).
This was over and above the price increase of Rs 2.5 (5.5%) in December.  The average price
of India crude oil basket in the quarter ending September 2010 was 76.22 $ per barrel. If we
take that the Rs 5 per litre of increased in December and January  2011 corresponds to an
increase in the crude oil prices of 8.28 $ per barrel between the Sept  and December quarter.

So we can say that the thumb rule for India should be about Rs 6 increase in the petrol prices
at the station for every 10 $ increase in the price of crude oil. So as the price of crude in this
quarter is already 96.43 $, an increase of over 11 $ from the previous quarter, if the Indian
government and OMCs decide to act, be prepared to face be an increase of Rs 7- 8 per litre of
petrol at the station.