Petrol prices: The new headache

It is that time of the year again. Petrol bomb is all over the news. People have apparently been hit by the bomb for the fifth consecutive fortnight. The price notifications are being rejected left, right, and center. Those at the helm are finding other silver linings to tweet about. It is hard to fathom that a phenomenon as simple as petroleum pricing fails to be communicated well enough and continues to trigger “rejections”.

But before going into the rather simple details, it would be worth reminding everybody that the incumbent government has no one else to blame for the rather undue criticism it attracts, than herself. Having criticized the previous government for every price increase and terming taxes and levies unjust – life has come full circle for the PTI to haunt it.

Now to the basics. The reference Arab Light crude oil price has increased by 40 percent in this fiscal year to $58/bbl used for February petroleum prices. Rupee has gained 4 percent over dollar in the same period. Petrol price since at the start of FY21 has gone up by 11.78 percent. This simply means the government has given up on tax revenue on petroleum products. It does not get simpler than this.

The only lever that the government has is the Petroleum Levy (PL) which can range anywhere between Rs15/ltr to a maximum of Rs30/ltr. The very idea behind capping the upper limit for the PL at Rs30/ltr was to capitalize if oil prices present with an opportunity to maintain retail prices. The government got lucky for the most part of 1HFY21 as PL averaged Rs29/ltr, while maintaining retail prices at lower levels than yesteryear.

That luxury was always going to be tested and was only a matter of when and not if. As evident from the chart, the ability to levy more taxes diminishes with the rise in crude oil price. This is not necessarily a near-term headache for the government, as significantly higher than the targeted amount has been netted in 1HFY21, and PL would be close to, if not in excess of Rs450 billion full-year target.

Oil price prediction is risky business. But considering the momentum around them, it would be fair to say oil would stay north of $50/bbl in 2HFY21. On year-on-year basis, petroleum prices will soon start looking a lot worse, as the low base is about to come to play. PL would be the likely casualty, if the government intends to not let petroleum retail prices go higher year-on-year.

For the popular media and politicians, none of this matters. Free petrol does. Here is to another 15 days before it starts all over.

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