Global energy markets have been rattled by rising geopolitical tensions, pushing Brent crude close to $108 a barrel this week. Yet, petrol prices in India have remained largely unchanged.
The reason: a calibrated “shock absorber” system where oil marketing companies (OMCs) and the government smooth out global volatility—shielding consumers in the short term, but not without trade-offs.
For most countries, a spike in prices translates quickly into higher fuel costs. In the US, for instance, a gallon of regular petrol that averaged $2.94 in February now costs $3.58—a 20% increase—according to AAA Fuel Prices, a retail fuel price tracker from the American Automobile Association.
In contrast, petrol in cities like Mumbai has held steady at around ₹103 per litre in recent weeks.
OMC buffer
At the core of this stability are state-run oil marketing companies (OMCs) such as Indian Oil and Hindustan Petroleum.
When international prices surge, these companies often absorb the increase instead of passing it on immediately to consumers.
According to Madan Sabnavis, chief economist at Bank of Baroda, “In the interest of social stability and to shield the common citizen from sudden inflationary shocks, domestic oil marketing companies often maintain steady product prices even as global crude costs climb. This vital buffer remains in place until international benchmarks reach more critical thresholds, typically above the $100 per barrel mark over a longer period of time, say 2 to 3 months.”
In practical terms, even if costs rise sharply—from around ₹55 per litre to significantly higher levels—OMCs may take a hit on margins to keep retail prices stable. Conversely, when crude prices fall, some of the gains are retained by these companies to offset earlier losses.
Price build-up
Fuel pricing in India is a layered construct.
The base is the Refinery Transfer Price—the cost of processing crude. This is followed by dealer commissions, typically ₹2– ₹4 per litre, paid to petrol pump operators.
Next comes excise duty, a fixed levy imposed by the central government, and finally, state-level VAT, which varies across regions—explaining price differences between cities like Mumbai and Delhi.
Because excise duty is fixed, it does not automatically rise with crude prices. This gives the government flexibility to manage price volatility—either by adjusting duties or by asking OMCs to absorb costs.
The system also works in reverse.
When global crude prices fall—say to $60 per barrel—retail prices don’t always decline proportionately. Instead, the government may increase excise duties to shore up revenues.
As Deepak Mahurkar, partner at PwC, explains, “The government occasionally tends to raise excise duties, utilizing the windfall to fortify the exchequer and fund essential infrastructure and social welfare programs. This approach ensures that while consumers may not see a one-to-one drop in fuel costs, the savings from lower global oil prices are redirected into long-term national development.”
Managed pricing
This calibrated approach helps prevent sudden spikes in inflation in a country where fuel prices influence everything, from groceries to school bus fees.
While may not fully benefit from global price declines, they are also protected from sharp spikes.
In effect, petrol pricing in India is a managed outcome—where the government and OMCs balance consumer stability, fiscal needs and corporate margins.