In this edition of Macroscan, we will understand how hikes in oil prices disrupt the country’s economic recovery. We shall also understand if there is something wrong with the costs that Indian consumers pay.
Last week, India flagged high oil prices and pressed OPEC to make these prices more affordable. Petrol prices are a major issue any incumbent government in India grapples with. It is more than an election issue; it is the economy’s lifeblood and a dealer of inflation.
It is common knowledge that 80% of India’s petroleum needs are sourced externally. This dependency puts India at the mercy of international oil prices and their associated volatility. India accounts for ~9.5% of all crude oil imports, making it the third-largest importer. Let us look at why we should care.
Note: More than 160 types of crude oils trade in the markets; we are benchmarking according to BRENT Europe Spot. Most of the purchases are performed in derivatives rather than spot markets, but we chose spot rates because the availability of this data could be arranged quickly.
There is evidence that the petroleum products industry is performing rather poorly in the last few years.
To better understand India’s tryst with crude oil imports and exports, we invented a measure called Representative Barrel (RB). It tells an accurate story by weighing the compositions of imports and exports and representing it in a barrel unit. It includes crude oil, LPG, MS, Naptha, Fuel Oil, etc. (Please write to us if you are more interested in RB).
In 1999, India paid roughly $13.75 to purchase one RB, while in 2020, the price was $43.4 on the import side. On the export side, the figures were $16.2 and $51.3 in 1999 and 2020, respectively. The difference between those prices roughly tells us about the value addition – $2.53 and $7.99 per RB in those years.
A graph representing this value addition metric is plotted below.
Data sourced from 
Since 2018, these value addition margins have been falling. Competitive pressures from refiners abroad explain part of the story. Low investments in R&D, the disproportionate concentration of supply infrastructure, inadequate capex by OMCs, and increased dependence on external oil supply also explain this phenomenon to an extent.
Caveat: This measure is macroeconomic. It ignores operational facets of the story. Thus, it can help us establish the ‘what’ and not the ‘why’ easily.
India is a special case when it comes to crude oil imports.
We use average monthly BRENT Europe spot prices to understand how crude oil (and derivatives) quantity demanded depends on the costs – therefore establishing a measure of elasticity. We worked with data from September 1987 to February 2021 for global calculations and January 1993 to February 2021 for India. The results of our analysis are as follows.
|Lag 0||Lag 1||Lag 2||Lag 3|
Data sourced from  and 
Note: Lag’ n’ is calculated as:
% change in quantity for xth time period / % change in BRENT Europe Spot for x-nth time period
Our analysis established that Indian demand is slow to react towards changes in crude oil prices immediately. The magnitude of demand change in the first month, however, is higher than the global average. The effects of price hikes persist until the end of the second month in India, whereas globally, they start recovering by the end of the first month.
Lower crude oil prices are almost a major prerequisite to restarting the growth cycle by early 2022 because slowness to react often causes a higher-than-expected drain on the trade balance. This slowness could be mitigated when the quantum of price changes is manageable, i.e. at the lower end.
Caveat: These are average elasticities. We removed outliers after establishing upper and lower bounds by formulae:
UB = Q3 + 1.5 X IQR, LB = Q1 – 1.5 X IQR, where IQR = Q3 – Q1
More analysis would be required to attribute quantity changes to price changes; other economic factors may be involved.
Tthe government does not fully pass on the benefits of a low crude oil price to the final consumers.
Let us discuss how the prices that a consumer in Delhi faces in India have fared against the BRENT.
On the left, we plot monthly figures from June 2014 to April 2018 because this data was readily available. On the right, we present average annual figures from 2014 to 2021 (till May). These graphs tell a similar story. In the chart on the right, we observe that the movement was negatively correlated from 2018 to 2020; as the global prices plummeted, Indian petrol prices moved upward.
Data sourced from 
It would be interesting to determine the effects of price cuts for petrol on GDP growth (we have not performed this analysis because it was out of scope for this edition, but we strongly urge you to share your ideas with us).
Below is a breakdown explaining how final petrol prices are calculated in a reference city (Delhi)
Data sourced from 
Trivia: According to our analysis, Chennai has the highest variance while Kolkata the least among the four major metros when it comes to petrol prices.
To drive across the point that Indian customers are being charged excessively, we present a final metric.
Let us try setting up an index to visualize the discrepancy between some important countries and one litre of petrol. Imagine that every country has the same per capita income momentarily, but petrol prices are allowed to fluctuate. Let us take the US as a benchmark and say that a litre of petrol costs us $100. Below is the same litre of petrol, priced at various levels in different countries.
Data sourced from 
This index predicts that the same litre here in India will set you back by a cool $4,641.
Out of 155 countries on the list, India scored a position of 129. The only countries that fared worse than India are usually a combination of the following.
- War-torn countries
- Deprivation-stricken regions
- Failed states
- Landlocked countries
- Chronically short of any infrastructure
Combating high petrol prices is something of great concern to the common folk of this country. With this edition, we hoped to highlight some interesting aspects while discussing crude oil prices and helped you visualize the extent of ripping off that is taking place in India.
Petroleum Planning & Analysis Cell as accessed on 25th June 2021
Petrol Prices In India by Vishnu Varthan Rao as accessed on 25th June 2021
GDP Per capita/Fuel price index
EIA: Petroleum and other liquids (Sourced from Thompson Reuters)
The Economics and International Business Club of IIM Indore
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