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How the Drone Attack on Saudi Arabia's Aramco Oil Plant Will Affect Indian Households Petrol and diesel prices may go up in case global crude oil prices remain elevated

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Brent crude oil price jumped 20 per cent in early trading on Monday, the first trading session after oil supply in the international market was disrupted due to an attack on Saudi Aramco's oil processing plant on Saturday.

The drone attack on Saudi Arabia's plant led to a hit of 5.7 million barrels per day of production, equivalent to 6 per cent of global crude oil supplies. Sector experts believe that crude prices may see further spurt in the coming days and Brent could go up to US$80 per barrel from the current levels in no time, and even breach US$100 per barrel if supply is not restored quickly.

Indian refiners

Saudi Arabia is one of the leading crude oil suppliers to India with around 20 per cent share. In FY19, Indian refiners bought 40 million barrels of crude oil from Saudi Arabia. India is dependent on crude oil imports for more than 80 per cent of its annual requirement.

Experts, however, also believe that the prices may get contained as there are cargoes already on ships and pipelines which may suffice for a few days and will allow time to the Kingdom to restore supplies. India can also draw from its strategic reserves or caverns it has built to store crude oil to overcome these situations.

In addition, the US and Russia have also emerged as major crude oil suppliers in the international market which will cushion to a great extent the void created due to short-supply.

Diesel, petrol prices

Though state-run oil marketing companies—Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation—did not increase diesel and petrol prices on Monday, sustained increase in global crude oil prices will affect fuel prices.

A litre of petrol in New Delhi on Monday cost INR72.03 whereas diesel cost is INR65.43 per litre.

The oil marketers at present follow dynamic pricing wherein they are free to change fuel prices every day. They benchmark prices to international product prices of same quality and then take into account import parity to arrive at the cost. In turn, international product prices are linked to crude oil prices.

An immediate impact on domestic fuel prices is unlikely as oil marketers take into account last 15-days rolling prices.

It should also be kept in mind that state and Centre also levy taxes on fuel. While the Centre levies a fixed excise duty of INR15.83 on per litre of diesel and INR19.98 on per litre of petrol at present, states levy ad-valorem value-added tax (VAT). So when base prices charged by marketers go up, there is an exponential impact on price charged to consumers due to higher VAT.

Diesel and petrol are not covered under the Goods and Services Tax.

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