Introduction
To categorise petrol as being just another commodity, would understate its significance. Long before it became a household expense, it served as an instrument of industrial expansion, military strategy, and statecraft. From the oil shocks of the 1970s to the Gulf Wars and more recently, the disruptions following the Russia–Ukraine and West Asia conflicts, governments across the world have rarely treated petroleum as something that could be left entirely to the market. Instead, prices at the petrol pumps have almost always reflected a negotiation between global markets, domestic fiscal priorities and political considerations.
India’s own relationship with petrol pricing has followed an uneven trajectory. Until the early 2000s, petroleum prices were largely administered by the state under the Administered Pricing Mechanism, which had been put in place to insulate consumers from international volatility but this led to substantial fiscal costs on the government and Oil Marketing Companies (OMC) (Government of India, 2002). After a gradual process of deregulation, petrol prices were officially deregulated in June 2010 and then followed up by diesel in October 2014. This was done with the expectation that retail prices would increasingly reflect movements in international crude oil markets (Petroleum Planning and Analysis Cell, 2010).
Yet the years that followed reveal a more complicated story.
Between 2017 and 2026, global crude prices fluctuated wildly. Following a period marked by stable prices, Brent crude collapsed during the COVID-19 pandemic as demand plummeted, reaching USD 19.9 per barrel in April 2020. On 21 April 2020, the United States’ (US) crude oil price turned negative for the first time in history, resulting in producers initiating payment to the buyers to take the barrels due to storage issues. This was due to reduced demand and failed negotiations between Russia and the Organization of the Petroleum Exporting Countries (OPEC) to reduce daily barrel production resulting in oversupply. The international prices of crude oil started to recover gradually in 2021 and rapidly rebounded, surging after Russia’s invasion of Ukraine in February to USD 94 per barrel 2022. As conflict intensified, the crude price reached USD 116 per barrel in June 2026, and further moderated between USD 70-82 per barrel till the end of 2025.
If Indian petrol prices simply mirrored these movements, consumers should have experienced equally sharp fluctuations at the fuel station. However, they did not. Instead, it was observed that retail petrol prices have displayed over time; an unusual stability. Prices often remained elevated or did not fall proportionately even as international crude prices declined, while periods of rising crude were often met with delayed or moderated adjustments. At the same time, tax collections from petroleum products became an increasingly important source of public revenue for both the Union and state governments. Excise duty revisions, state Value Added Tax (VAT) policies and temporary pricing interventions all became a part of the story. Fuel pricing, in other words, remained politically managed in practice even though in principle they had formally de-regularised.
This report, therefore, tries asking a straightforward but important question: If petrol prices are officially intended to be market-linked, what actually ends up determining the price consumers pay? By shifting attention from the headline price to its underlying composition, the analysis offers a clearer picture of how India’s fuel pricing system has evolved over the past decade and what that implies for fiscal policy, market transmission and consumer welfare.
Research Objective
The report in this course addresses five questions. First, how closely have domestic petrol prices trailed international crude oil prices over the past decade? Second, what explains the persistent difference in petrol prices between Delhi and Mumbai despite both cities having the same crude rate? Third, how has the composition of retail petrol prices changed across different phases of the oil cycle? Fourth, what role does taxation play in shaping retail prices during periods of exceptionally low and exceptionally high crude prices? And finally, what do changes in the residual component reveal about the pricing behaviour of OMCs during episodes of price rigidity?
Using monthly retail price data and PPAC price build-up statements issued by Petroleum Planning and Analysis Cell (PPAC), this report seeks to move beyond headline fuel prices and examine how different components of the retail price interacted during one of the most volatile periods in the history of global energy markets. The objective is, therefore, not to evaluate the desirability of any particular pricing policy but to document, using publicly available evidence, how India’s petrol pricing framework functioned under very different international market conditions.
Research Methodology
The analysis relies entirely on publicly available secondary data compiled from various government sources for local and international petrol prices and taxation rates. Exchange rate data were also collected from publicly available sources.
The monthly retail petrol prices of Delhi and Mumbai for the time period of June 2017 to June 2026 have been extracted from the data sets provided by PPAC, Ministry of Petroleum and Natural Gas. Daily retail prices published by PPAC were converted into monthly averages to minimise the influence of short-term volatility while also preserving and accounting for longer-term pricing trends. Monthly averages also provide a clearer basis for comparing domestic retail prices with changes in international crude oil prices over extended periods.
Delhi and Mumbai were selected because they represent two distinct tax regimes. Delhi levies a lower state VAT while Maharashtra imposes a higher ad valorem VAT together with additional state cesses on petrol. Since the international crude component remains identical for both cities, comparing these two markets provides an opportunity to isolate the influence of state-level taxation on retail fuel prices.
International crude oil prices were transformed to rupees per litre based on their price in US dollars per barrel using the exchange rate at each month and the customary conversion factor of 159 litres per barrel, assuming that all the petrol imported was supplied to refineries.
To analyse the components of retail prices of petrol, PPAC “Price Build-Up of Petrol” documents were acquired for six selected periods that marked critical junctures within the pricing cycle: October 2018 (high price period prior to the pandemic), April 2020 (collapse in crude prices due to COVID), October 2021 (price peak prior to Ukraine war), April 2022 (right after Russia-Ukraine shock and price freeze), June-July 2024 (post-March 2024 price decrease due to excise cut), and May 2026 (latest data point available). The above mentioned observations constitute the raw material for the decomposition analysis shown in Graphs 3 and 4.
Using the official price build-up statements, each retail petrol price was separated into three components: (i) the international crude oil component, (ii) taxes comprising Union excise duties and state VAT, and (iii) a residual component capturing dealer commission, freight, OMCs margins, road and infrastructure cess, agriculture infrastructure and development cess, and other balancing items reflected in the PPAC build-up. This residual is not interpreted as pure profit; rather, it functions as an accounting remainder that captures all non-crude and non-tax components of the retail price.
Retail petrol prices are decomposed as: Retail Price = Crude Component + Taxes (Excise + VAT) + Residual
Petrol Prices Did Not Always Move with Global Crude Oil Prices
Conventional wisdom suggests that deregulated fuel prices should closely track movements in international crude oil markets. If crude becomes cheaper, petrol should follow and vice-versa. India’s pricing experience over the last decade, however, tells a more complicated story.
A closer look at Graph 1, which compares the monthly retail petrol prices in Delhi and Mumbai to the international crude oil prices from June 2017 to June 2026, reveals that all three series seem to be moving in the same direction. This makes sense, as you would expect retail prices to rise when crude oil prices are high, and to fall when they’re low. For example, during the recovery from the pandemic, retail prices increased as crude oil prices went up, and then they softened a bit as the international oil markets started to stabilise after 2022. However, the relationship between these prices isn’t as straightforward as it seems at first glance. The changes in retail prices don’t happen right away, and they’re not always proportional to the changes in crude oil prices. This suggests that there are other factors at play that can affect the price of petrol in Delhi and Mumbai, and that the relationship between these prices is more complex than it initially appears.
The most striking divergence appears during the first wave of the COVID-19 pandemic. Between October 2018 and April 2020, the international crude fell from approximately INR 45.43 per litre to just INR 33.72 per litre, reflecting the unprecedented collapse in global oil demand marked by nationwide lockdowns and travel restrictions that were implemented to counter the pandemic. (International Energy Agency [IEA], 2020). Retail petrol prices, however, for the most part declined far less sharply. Between October 2018 and April 2020, the crude component of retail petrol prices fell from INR 37.06 per litre to INR 9.56 per litre, nearly three-fourths decline. Retail prices, in comparison, recorded a much smaller correction. In Delhi, average pump prices declined from INR 81.92 per litre to INR 69.59, Mumbai on the other hand recorded a fall from INR 87.63 to INR 76.31. While consumers did benefit from lower prices, when one looks at the numbers; the reduction is far less modest than the sharp decline in crude price would suggest. Movements in international oil prices were therefore, only partially transmitted to retail fuel prices.
