Petrol, diesel excise duty hike: Consumers won’t lose, oil companies won’t lose much

As the sale of diesel and petrol slumped to its lowest level of around 60 per cent decline on-year in April 2020, the government had let oil companies earn higher margins on petrol and diesel.

Even as oil marketing companies Indian Oil, HPCL and BPCL agree to absorb the steep hike in excise duty on petrol and diesel, these companies’ net marketing margins will still remain above the normal levels. OMCs were earning nearly Rs 16 per litre net marketing margin on sale of petrol and diesel in April 2020 on account of fall in crude oil prices to $25 per barrel, said Yogesh Patil, Senior Research Analyst – Oil & Gas, Reliance Securities Ltd. However, now, despite an increase in taxes on petrol and diesel, oil companies are still earning net marketing margins to the extent of Rs 4 per litre, which is above normal level, he added. Rs 1-2 per litre is considered to be the normal range of net marketing margins.

As the sale of diesel and petrol slumped to its lowest level of around 60 per cent decline on-year in April 2020, the government had let oil companies earn higher margins on petrol and diesel. However, crude oil prices began rising, and are on uptrend since the start of May, after OPEC+ nations came to a consensus on cutting supply. With the high input cost, the government may cut the tax on fuel which is too high after the last revision.

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On the other hand, upstream oil companies, such as ONGC and Oil India, which are involved in exploration and production (E&P), may be fearing a loss. In the current low crude oil price regime, it is believed that upstream companies like ONGC and Oil India will witness significantly lower total income during FY21 on account of a sharp deterioration in their price realisation as well as lower production for the next two quarters, according to a report by Care Ratings.

Meanwhile, a recent report by Care Ratings mentioned that even the central government will not accrue a sizable amount as excise duty revenue, given the current economic slowdown. It held the sharp fall in demand for petrol and diesel due to slowdown responsible for the lower-than-anticipated earnings as the tenacity of the lockdown imposed and when it will be lifted is still unknown.

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