How dynamic are fuel prices?

Petrol prices were market-linked in 2010 and diesel later in 2014 for retail consumers. Although I do encourage and support this move as they would improve fiscal balance, make energy usage more sufficient and would be better for the environment as well. With market linking of prices, fuel witnesses frequent revisions to keep it aligned to the international prices. So, although post mentioned periods the prices officially were market-linked, and indeed frequent revisions of the prices were seen as compared to before, how dynamic this fuel price actually is?

At the wholesale side, the effect of market-linking is clearly visible from the chart below. The first chart contains international oil prices in $/bbl and Rs/bbl. I plotted both of them to also get an insight into exchange rate effects. It can be seen that post subsidization, oil price hikes are felt strongly in Rupee than oil price declines. So, the oil price dips in $ are closely tracked in Rs as well, however, oil price hikes in $ lead to higher hikes in Rs. This might probably be because oil price hikes usually cause depreciation due to high import dependence on oil. 

The second chart is the wholesale price index for petrol and diesel. Now comparing first and second chart, it can be seen that prior to 2010 for petrol and 2013-14 for diesel, international oil price volatility was higher as compared to the prices of petroleum products. However, post-market-linking of prices they track the international oil prices. 

So we have seen that whole-sale prices indeed are dynamic. But the chart below shows the retail prices. These were plotted using data for Petrol and Diesel retail price in Delhi. The gap in the data was due to data-unavailability. The major thing to see here is that the retail prices do not show as many fluctuations as the international or the wholesale prices do. Upon comparing the above charts with the retail prices one, it can be seen that the major difference in fluctuations in the retail price chart comes during the dips as compared to the hikes. For example - compare the period between Jun-15 to Mar-16. The wholesale price index showed a large dip but retail prices retained their levels. But observe then the pointed peaks in international and wholesale prices around Mar-16 and later between Apr-18 to Dec-18. Now looking at these periods in the retail price chart, we do observe similar peaks. Now shifting the focus to the period around Apr-20, the international and so wholesale prices crashed but retail prices slumped meagrely. 

Thus, although wholesale prices indeed are market-linked, retail prices do not seem to be. Price hikes are frequently passed on to the retail side but price declines do not do so. Instead, when the international price declines, the government raise excise duties to earn more revenue rather than passing it on as the dynamic pricing should. This seems to be creating asymmetric pricing on the retail side and not the market-linked pricing. Also, the rate at which retail price increases is more than the rate at which it declines (to whichever extent it does). So instead of having positive effects of market linking of prices, it might backfire.

But I think that if the government does use the collected excess revenues in public welfare and implements it efficiently, then the loss could be minimized. But it's a big if to expect from politicians.

Next point is the recent price hikes, that is, the steep rise witnessed in the retail price data post-Apr-20. The same story, as oil prices had dipped and the government increased excise to record highs, but after a few months of the oil crash resulting from corona when prices start to surge up, the retail prices rocketed up. During the time when the economy is already dwindling and the over-burdened middle class which makes up the tax revenues is struggling to meet ends, this quick rise in prices might be fatal for the economy. Dynamic fuel pricing could be born by citizens, especially when prices escalate due to strong social safety nets which can still keep energy affordable but India lacks that too. Further, I believe price revisions, at least at present when we are already in a crisis situation should not be this frequent - petrol rising more than Rs. 9 and diesel by more than Rs. 11 by 22 revisions of 24 days in June 2020.

So, although I do support dynamic pricing of petroleum products, I believe it should indeed be dynamic on the retail side and secondly, in the extraordinary times we are currently facing, this policy-induced hikes should be carefully implemented.


References
1. Blog of Dr. M. Pattabiraman
2. Petroleum Planning and Analysis Cell, Government of India
3. Nice reads - Indian express article; McCulloch, Neil, et al. How to Respond When Prices Go Up: Objectives and Options for Fuel Price Adjustments in Indonesia. International Institute for Sustainable Development (IISD), 2017, www.jstor.org/stable/resrep14755. Accessed 30 June 2020 - click here