I’m sure you would have noticed this anomaly, when Crude oil was at 60 USD per barrel just a few months back, you were filling your petrol at around ₹100/ litre.
Now, even though Crude oil has spiked above $110/barrel, you are still paying exactly the same.
Petrol pricing in India has very little to do with oil prices. It is one of the least understood parts of the economy.
So in this newsletter, we will unpack this mystery about petrol prices.
A Brief History of Who Decides your Petrol Prices
Until 2002, the government set every number in the oil supply chain through the Administered Price Mechanism (APM). Even when global crude prices moved, Indian petrol prices didn’t. The losses were absorbed by government-owned oil companies, quietly. The APM was dismantled in 2002, petrol was officially “deregulated” in 2010.
On paper, this meant Oil Marketing Companies or OMCs (Indian Oil, BPCL, HPCL) could revise prices every fortnight based on international crude. In practice, the game changed but didn’t end. Prices still get frozen to manage inflation, OMCs still absorb losses, and the government still pulls levers behind the curtain.
How Petrol is Taxed
A huge chunk of what you pay at a Mumbai petrol pump is just taxes – the State VAT and the Central Excise Duty.
The table makes one thing immediately clear. Since the pump price is frozen, OMC revenue is also frozen at ₹52/litre. Taxes, dealer commission, refining costs — all fixed. The only variable is crude. So the OMC margin is simply ₹52 minus whatever crude costs that day.
OMC breakeven sits at roughly $75-79/barrel at ₹95/$. Above that, every dollar rise in crude erodes margin directly, with no ability to pass it through. At $60 crude, OMCs quietly earn ₹9 per litre. At $120 crude, they lose ₹27 per litre.
But the government doesn’t sit idle when crude falls either. For eg. between 2014 and 2016, as crude crashed from $100 to $26, excise was hiked nine times, going from ₹9.5 to ₹21.5/litre. Similarly, when the crude spikes, excise is cut to reduce the losses of the OMCs.
Government fuel tax revenue has grown substantially without the consumer feeling almost none of it. Petroleum taxes contribute over ₹7.5 lakh crore annually to central and state coffers combined. That is too large a revenue stream for any government to voluntarily give up.
Quickly The Rupee Problem Nobody Mentions
There is a second variable that hits OMCs just as hard as crude: the exchange rate. Crude is priced in dollars. When the rupee weakens, the cost of every barrel rises in rupee terms even if crude has not moved.
At $80 crude, ₹84/$ gives a crude cost of ₹42/litre. At ₹95/$, the same barrel costs ₹48/litre. That is ₹6 extra per litre from a weaker rupee alone, with zero change in global oil prices. Multiply that across India’s daily consumption and a ₹10 depreciation adds hundreds of crores to daily OMC costs.
The dangerous scenario is when a crude spike and a rupee selloff happen together. And they often do. Crude shocks trigger risk-off sentiment globally, emerging market currencies weaken, and India’s import bill rises from both forces simultaneously. OMCs get squeezed on the crude side and the currency side both at once, while the pump price remains frozen.
Who Is Actually Paying
The losses in this system rotate. When crude spikes, OMCs absorb it first. Their profits shrink, balance sheets weaken, and stock prices fall.
When losses grow too large, the government steps in with excise cuts or subsidy packages, shifting the burden to the fiscal deficit and eventually to future taxpayers.
The 2026 cycle captured this pattern perfectly. Crude surged 75% in four weeks to $122 per barrel. Pump prices didn’t move. OMCs bled ₹2,400 crore per day. The government cut excise by ₹10/litre, reducing losses to ₹1,600 crore/day. It helped but didn’t close the gap.
The consumer’s share of any crude windfall across all these cycles? Close to zero. When crude is cheap, the government raises excise, and they, along with OMCs, capture the benefit. When crude is expensive, OMCs and the fiscal deficit absorb the cost. But what you really get is stability of prices across cycles.
What This Means for You
Petrol is a very sensitive topic in India. An upward change in petrol prices can have a direct impact on overall inflation and hence public sentiment. So while petrol prices are deregulated, there is an invisible hand of the Government managing the prices. The government, OMCs, and consumers are in a constantly renegotiated arrangement where each party absorbs the burden when it is their turn.
For investors watching OMC stocks (HPCL, BPCL, IOC), the key variable is not crude alone. It is the gap between the crude cost in rupee terms and the frozen pump price. When that gap is positive, OMCs look cheap and earn well. When it flips, losses appear fast. The rupee adds another layer: a currency that weakens alongside a crude spike is a compounding problem that does not show up in the crude headline but absolutely shows up in OMC quarterly results.
Another way to look at this is that if you’re bearish on Oil prices (i.e. oil will go down), you can be bullish on the profitability of these OMCs.
Next time you see a crude oil headline, the more useful question is not “will petrol prices go up or down?” It is: which layer of this system is absorbing the shock right now, and is that already priced into the stocks you hold?
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Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
