Why Petrol Prices Change

What makes up the price of petrol in India, from crude oil and the exchange rate to central and state taxes.

Petrol and diesel prices matter to almost everyone, affecting transport costs, food prices and household budgets. What determines them?

The components

The price you pay at the pump in India is made up of several parts:

Crude oil cost: the price of the crude oil used to make fuel, set in global markets.
Refining and transport costs.
Dealer commission for petrol pumps.
Central excise duty, set by the central government.
State VAT or sales tax, set by each state government.

Taxes make up a large share of the retail price, often a third or more depending on the state and the level of crude prices.

Crude oil and the rupee

India imports most of its crude oil. So pump prices depend on:

Global crude prices, which rise and fall with world supply and demand, OPEC decisions and geopolitical events.
The rupee’s exchange rate: crude is priced in dollars, so a weaker rupee makes imports more expensive even if dollar prices do not change.

Pricing system

India freed petrol prices from direct government control in 2010 and diesel prices in 2014. Since 2017, state-run oil companies have been allowed to revise prices daily. In practice, prices have sometimes been held steady for long periods, with the government or oil companies absorbing changes.

Why prices differ between states

Because states set their own VAT rates, petrol costs different amounts in different states. Cities near state borders sometimes see drivers crossing over to buy cheaper fuel.

When crude falls but pump prices do not

World crude prices fall sharply, but pump prices barely change. This can happen if the government raises excise duty to collect more revenue, or if oil companies recover past losses. In 2020, when crude prices crashed, India raised excise duties, so consumers saw little benefit while government revenue rose.

Ripple effects

Fuel prices affect the cost of transporting goods, so higher diesel prices can push up prices of food and other products, contributing to inflation.

Thinking petrol prices depend only on crude oil

Crude oil matters, but taxes, the exchange rate and government decisions also play large roles. That is why pump prices do not always move in step with world oil prices.

Key takeaways

Petrol prices include crude oil costs, refining, dealer commission and taxes.
Central excise and state VAT make up a large share of the price.
Crude prices and the rupee's exchange rate drive costs.
Prices differ between states because of different VAT rates.