The economics of petrol pricing

The increase in petrol price has come when the economy is turning a corner and inflation is coming down. Government revenues have also started reverting to normal. The argument for higher levies on petrol and diesel, which could have been justified when the crude oil price was low and consumption declined sharply, is not really strong now.

As usual, there is a discussion on what should be done to ease the prices. The Centre feels that the states should lower their taxes, which is an ad valorem levy. The states feel that the Centre has more legroom as it has already converted taxes into cess, which need not be shared with them. The Centre has pointed to the increasing crude price and made a plea to OPEC to expand output to lower prices.

There are four components to this price: the cost to the dealer, which includes the crude oil price and other processing charges, excise duty charged on per unit basis by the Centre, a dealer commission to the fuel station and a VAT imposed by the state.