The government has increased petrol and diesel prices by Rs 3 per litre after maintaining steady prices for several weeks despite rising global crude oil rates. This decision comes as a response to both global and domestic factors that have made it increasingly challenging for oil companies to absorb their losses. Previously, reports indicated that rising crude oil prices, alongside the depreciation of the rupee and geopolitical tensions in West Asia, intensified the need for a price adjustment.

The constant rise in crude oil prices has placed immense pressure on India’s fuel import bill, which is expected to grow considerably as global tensions persist. India is largely dependent on imported crude oil, fulfilling approximately 85 per cent of its requirements through imports, thus making the country highly susceptible to fluctuations in global markets.

As a result, the cost of the crude oil basket that India imports has surged from around $69 per barrel before escalating conflicts to approximately $113–114 per barrel in recent weeks. Even on the day of the price hike, Brent crude was trading at $107.20 per barrel, while WTI crude reached $102.66 per barrel, marking an increase of over 1.4 per cent for both benchmarks.

Impact Of Geopolitical Tensions

The ongoing conflict in West Asia has significantly influenced the recent fuel price increase. Heightened tensions in the region have led to uncertainty in global oil markets, given that West Asia is a key player in crude oil production. Market fears of potential supply disruptions have caused crude prices to skyrocket, thereby affecting nations like India that rely heavily on oil imports.

The escalating conflict has sparked concerns of a potential global oil supply shortage. With global markets reacting to increasing tensions, any further deterioration could cause significant declines in oil shipments from the region. This escalating scenario compels countries to compete for available oil supplies, pushing domestic energy costs higher for importing states like India.

Another contributing factor to the rise in prices arises from the ongoing disruptions near the Strait of Hormuz, an essential corridor for global oil shipping. Reports of incidents and shipping disruptions in this critical route have resulted in heightened delays and uncertainty in oil transportation, thereby raising shipping and insurance costs associated with crude oil imports.

Economic Pressures On Fuel Companies

The increase in crude oil prices has also escalated refining and operational costs for oil companies. As the cost of crude rises, the expenses associated with refining processes and logistics have similarly surged. State-run oil marketing companies have been absorbing some of these increased costs for nearly eleven weeks. As prices persisted at elevated levels, continuing to hold back retail prices without adjustments became unsustainable for these companies.

Moreover, the depreciation of the Indian rupee has further complicated the landscape for oil imports. Since crude oil is traded in US dollars, a weakening rupee means higher costs for importers, raising the financial burden even further. As of Thursday, the rupee settled at 95.7625 against the dollar after hitting a record low of 95.9575. This ongoing decline has been attributed to rising US Treasury yields and increased demand for the dollar.

In recent weeks, government officials have begun expressing concern regarding rising energy costs. Prime Minister Narendra Modi has urged citizens to conserve fuel and minimise unnecessary consumption, with warnings from the Reserve Bank of India and the International Monetary Fund indicating that persistent high crude prices could necessitate further increases in fuel prices in the near future.

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