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Rs 100 may be the new normal for petrol in high-VAT states

(This story originally appeared in on Feb 23, 2021)

Soon, Rs 100 could be the new normal for a litre of regular petrol in states with high VAT and cess, unless fuel taxes are reduced or the oil-producing countries raise production sharply from April.Three Wall Street banks – Goldman Sachs, Morgan Stanley and Bank of America – have in the last two days forecast oil at $70/barrel in the next few months and even a spike to $75 thereafter. What is worse, Goldman said even an OPEC+ decision to raise output would not calm prices as supply would still lag behind demand.Petrol recently topped the Rs 100 a litre-mark in some cities of Rajasthan and Madhya Pradesh on sustained oil price rally and high taxes. In a sign of things to come, benchmark Brent crude on Wednesday stayed put above $65/barrel. India’s crude purchase cost too rose to $63.90 on Tuesday (there is a day’s lag) from $62/barrel on Monday.The mix of crude bought by Indian refiners usually costs $2-3 less than Brent and the gap narrows as price rises. So at $70/barrel of Brent, India’s crude cost would be $68/barrel, marking an increase of $6-7 from the current average. Industry insiders said every dollar increase in crude price pushes up petrol price by 55 paise per litre and diesel by 60 paise in Delhi, the reference market, which taxes fuels moderately.So at $70 of Brent, petrol would become costlier by a minimum Rs 3.30 a litre in Delhi, assuming other conditions remain unchanged and retailers dutifully pass on the impact. Diesel price would rise by Rs 3.60. The increase would be steeper in states with high VAT/cess such as Maharashtra, Rajasthan and Madhya Pradesh.Such an increase will push regular petrol price beyond Rs 100 a litre in Mumbai and many cities across states with high VAT and above Rs 95 in others. Diesel prices too would hit Rs 90 level. In Delhi petrol would cost over Rs 95 and diesel Rs 85.

The only hope for consumers lies in the central and state governments reducing fuel taxes or the OPEC-Plus grouping of oil producing countries deciding to raise output at its meeting next week. Rajasthan, Assam, Meghalaya and West Bengal are the only states that have reduced VAT/Cess ranging between Re 1 and Rs 7. The Centre has refused to cut excise duty. Both taxes make up over 60% of retail prices and amplify the impact of rising crude. Goldman had on Monday said oil would hit $70/barrel in the April-June period and spike to $75/barrel in the July-October quarter (calendar year) on faster rebalancing of the market.On Tuesday, Morgan Stanley and Bank of America echoed the view by raising earlier projections by $10 by saying oil prices would average $60/barrel this year and spike to $70 in between.

Source: Economic Times

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