Complete Economics & Business Analysis of Rise in Petrol Prices
**PETROL PRICES SLASHES below Rs 100 mark!!!!**
We all have been waiting for this news to breakout real soon, aren’t we? But we won’t be lucky enough to hear such news for some time. Lately, we all witnessed petrol prices to have skyrocketed in Q1 FY’21 against Q1 FY’20 with prices scoring above century (& counting) with no evidence when it would fall below 100 mark – or we might never see it below the 100 mark. In this article, we would understand the economics behind the increase in price of petroleum products and the reason why we won’t get relief for now.
Primarily, the oil bonds which the previous goverment agreed to had put a dent on nation’s reserve with huge debt (in crores), and hence the foremost reason to increase fuel prices to overcome this burden. Subsequently, high price on crude oil (per barrel) being charged by OPEC countries add on to the nightmare. With price tag of Rs. 34.2/L when borrowed, it took no less time to become Rs. 69.3/L after inclusion of State Tax VAT and Central Tax Excise Duty above the actual petrol Price. The govt quote this levying of high taxes to be compensated for various developmental activities conducted by them which includes free vaccination drive, plants setup by govt in Assam territory etc. And with petroleum industry an easy target for both Central and State goverment to fill up their reserve real quick, thus the huge amount of taxes being levied on it to set off there expenditure and balance their budget to overcome this pandemic situation.
Let's understand the economics behind!!
Since the beginning of this pandemic, we observed a series of lockdown worldwide, which took toll in demand/supply relationship, currency exchange rates, global cues and hence a downfall in fuel consumption. However, with minimal operations still active (which included shipping/airborne of medical supplies/equipment/food supply etc.) and with reopening of trade/tourism after witnessing downfall in covid cases, there has been a surge in fuel consumption again. Hence the opportunity for various governments to overcome the losses incurred due to covid-19 situation by levying high taxes on fuel.
Indeed, this pandemic has crippled our country’s economy by reaching new low of negative 23% with petroleum sector witnessing a huge variation in its prices from a drop to negative value in crude oil in initial phase of few months of pandemic to a sudden change in its demand due to worldwide lockdown following the Q4 trend in the Financial Year 2019-20, thereby reaching new heights in value every day. This suffering on our economy is due to high dependency on international market to fulfill the country’s oil demand. Considering the direct proportion of demand and supply, proliferation in crude prices also proportionate with demand/supply relationship, thus the increase in crude oil prices internationally, would force the ruling government to collect huge taxes on the imported resources. Apparently, the non-inclusion of Petroluem sector under GST, gives an upper hand to both State and Center government to levy high taxes.
What are the reasons for this swift in demand?
Re-Opening of business operations globally contributed by economic activities (Factories, Machines) and social activities (Social Events, Gatherings, Rallies etc.).
Proliferation in Logistics (Courier/Delivery Services), Transportation (essentials/medical accessories-Oxygen Concentrators, Cylinders) and tourism activities.
Surge in Electricity consumption with people working from home during covid time. Staying at home to entertain the lifestyle with TVs, Gaming etc.
'In modern times, Petroleum products has turned out to be a significant factor for different Industries, however, it has both positive and negative impact.'
What are some Positive Changes?
1. Tourism – Since the travel restrictions have been pulled up and various states have removed stringent requirements for local business to regain its operations. People have shown sudden rush to sneak out of their homes increasing the demand for fuel. Creating a Positive shift in demand.
2. Event Management – As restrictions to social gatherings have ease up. There’s a boom in Marriages, Event’s, Functions, Get togethers. Creating a shift in demand, for Banquet Halls, Tent Houses, Event management businesses. Petrol generators have been most used machine in Tent Houses. Therefore, showing an upward demand.
3. Online Sector – Now though people are more getting used to online purchase and sale activities. Due to Covid, people has resisted going out for the household needs, as well as services. Small to big, every item was being delivered at doorstep, increasing the demand for delivery services.
What are the Negative Change?
1. Automobile Industry – There is both positive and negative change in the demand of the automobile industry. As there is decrease in demand of Petrol Diesel fuel Vehicles, whereas increase in the demand of Electric Vehicles. As fuel prices has influenced/induced customers to adopt and adapt CNG and EVs.
2. Cosmetics Industry – Since many cosmetics products contains use of petroleum, its rise in cost also rise the cost of the cosmetic products, which affects the price of cosmetic products affecting it’s demand and sale.
3. Online Sector – One other factor which has negatively impacted the online sector is that as before there used to be free delivery, which was implicit cost in the product, but now online sector has changed its policies owning to recent developments. Now they charge delivery charges separately, which sometimes shift the buyer from one point to another point.
What is an Overall impact?
- Affect on Real Income – Although the price of the product get increased, however, there isn’t any increment in the income (it remains constant). What can we interpret with this? You may ask! This means that with increase in price of the commodity it would reduce the purchasing power and hence a drop in demand. Increase in petroleum does affect purchasing power but increase the revenue in developing countries especially India and china, in the long run helps in greater GDP growth with increase in amount of jobs or employment generation programmes implemented by the govt.
- Rise in Inflation rate – An increment in price of oil by just Rs 1/L can increase inflation 4x times. For instance, an increase in oil price has soared transportation cost substantially, thus the primary reason for an increase in cost of dairy products (milk fare up by 2rs/L per se) by all dairy companies (Mother Dairy, Amul for instance).
- Shift to alternatives – It is evident from history that whenever price shoot up in a particular commodity (X), people tend to swift towards low priced commodity (Y). Similarly, soaring of oil prices has taken a back seat in demand of combustion vehicles and the automobile industry have been witnessing drastic shift in common man’s interest towards EV’s. This shift in demand for EV’s has pushed combustion vehicle manufactures in India (Toyota, Maruti, Tata, MG, etc.) to switch to manufacturing of EV’s, thereby witnessing surge in sale of EV’s. With goverment offering subsidy to promote purchase of EV’s, has put an acceleration in its sale. Major change in preference relates that people have started using public transport as medium of commute which in majority confine of Metro and E-rickshaw. Both are ecofriendly and economical mode of transportation than personal vehicle. Government of India already announced BS-7 standard for vehicle manufacturing. From 2030, India only sale and manufacture non commercial vehicles under BS7.
- Environment benefits – Reduced consumption of fossil fuels, Shift to EV’s, Less number of combustion vehicles etc. would surely have a huge impact on environment, resulting in reduction of carbon emission, augmenting ozone layer, cleaner air, restructuring the mode of transportation and ofcourse would not exhaust non-renewable resources.
Conclusion
Considering people’s point of view, this move by government to hike oil prices is not at all appreciated by them and ultimately goes against their sentiments. However, from country’s economics standpoint, this move has benefited India as country with people shifting to alternatives (EV’s and surge in use of public transportation), benefit to environment and ofcourse reduction in consumption of non-renewable resources and pollution (Evident from lockdown during the pandemic situation, significant improvement in the air quality). It can be said in a way that it’s a Qualitative Measure that government has taken to protect environment with the Green Accounting Principle of Polluter Pays the Price.
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