Government, Oil Companies Can’t Absorb Energy Shock Indefinitely, The Looming Reckoning for Indian Fuel Consumers
For India, the exposure to the ongoing West Asian energy crisis has been severe. A significant share of the country’s crude oil imports, as well as its liquefied petroleum gas (LPG) and liquefied natural gas (LNG) volumes, transit through the Strait of Hormuz—a chokepoint now effectively closed by Iran. Within eight days of the disruption, the government issued the LPG Control Order. Refineries were directed to maximise LPG yields to meet domestic demand, despite such production being uneconomic under normal circumstances. LPG production was increased from 36,000 metric tonnes to 54,000 metric tonnes per day. On the demand side, priority was accorded to protecting supplies for domestic consumers. Similarly, in the natural gas sector, domestic piped natural gas (PNG) and transportation compressed natural gas (CNG) were prioritised. Export duties were imposed to protect supplies to the domestic market. The government acted swiftly. But swift action is not sustainable action.
Over the past two months, global crude oil prices have risen by 80 to 100 per cent, topping $120 per barrel at times, with product prices also increasing sharply. Yet, on petrol and diesel sold through retail outlets, these increases have not, so far, been passed onto domestic consumers. Instead, the exchequer has absorbed the burden through reductions in duties, and oil marketing companies (OMCs) have borne losses. The depreciation in the rupee-dollar exchange rate has only aggravated the challenge. The government and the OMCs have built a wall between the global price shock and the Indian consumer. But walls are expensive to maintain, and this one is cracking.
The crisis could have been far more crippling had India not significantly expanded its energy infrastructure over the past decade. LPG import terminals have increased from 11 to 22, LPG pipeline infrastructure from 2,311 kilometres to 6,242 kilometres, strategic crude reserves from zero to 5.33 million metric tonnes, and refining capacity from 215 million metric tonnes to 258 million metric tonnes. Ethanol blending has also risen from 1.53 per cent to 20 per cent, reportedly saving the exchequer more than ₹1.51 lakh crore. In addition, the refineries are operating above 100 per cent capacity utilisation to meet the increased demand. The infrastructure is better, but it is not enough.
The surge in energy prices has affected consumers worldwide. Most European and East Asian economies have increased retail fuel prices by 25 to 35 per cent. Several countries in India’s neighbourhood have resorted to fuel rationing, reduced work weeks, austerity measures, or have faced severe shortages. In contrast, Indian consumers have, by and large, been shielded from steep price increases, while supplies have been largely uninterrupted and free from major restrictions. This protection for consumers has been real, but it has not come without a cost. The obvious question is whether such a model is sustainable. The answer is clearly no. Neither the government nor the oil companies can indefinitely absorb such financial stress.
Fifteen major oil and gas companies together contribute approximately ₹7,40,765 crore to the government by way of taxes, duties, and other levies. Of this, ₹3,25,504 crore accrues to state governments, largely through value-added tax (VAT) on petrol, diesel, and aviation turbine fuel (ATF). Based on excise duty reductions alone, the government is estimated to lose nearly ₹460 crore per day—translating into almost ₹1,68,000 crore annually. These are not minor adjustments; they are significant fiscal drains.
There is also a widespread perception that oil companies make windfall profits whenever crude prices decline, while retail fuel prices remain unchanged. However, data published by the Petroleum Planning and Analysis Cell shows that the three major OMCs together earned a post-tax profit of ₹33,602 crore on revenues of ₹18,20,477 crore in 2024-25—a return of only 1.85 per cent, when the Indian basket of crude averaged 78.6perbarrel.Bycomparison,returnsduring2022−23(averagecrudepriceof93.2 per barrel) and 2023-24 (82.6perbarrel)were0.06percentand4.4percentrespectively,thelatterbeinganexceptionalyear.Evenin2019−20,priortothepandemic,whencrudeaveraged60.5 per barrel, returns stood at just 0.56 per cent. The oil companies are not profiteering; they are barely surviving.
The capital expenditure of the three OMCs stood at ₹72,000 crore in 2024-25, compared to ₹68,350 crore and ₹63,491 crore in the preceding two years. The industry operates on the principle of creating and enhancing supply infrastructure ahead of demand. This approach has largely ensured the uninterrupted availability of petroleum products even during periods of severe disruption, including times of natural calamities. LPG supplies during the COVID-19 pandemic are a recent example. The trend has to continue if the energy needs of a growing economy are to be met in the years ahead. These investments also extend to emerging energy options in the ongoing energy transition, besides planned expansion of storage capacities in view of evolving geopolitical realities.
Between March 16 and April 30, the total loss suffered due to prices being maintained is estimated at around ₹62,000 crore. Of this, the central government has suffered a loss of around ₹30,000 crore due to excise duty reduction, and the OMCs have borne the rest. This is the cost of shielding the consumer. It is a cost that is rising by the day.
Given the strategic importance of this sector, the companies must continue to function efficiently and generate adequate resources. The sector cannot afford to bleed indefinitely or end up with weak balance sheets. If the conflict persists, difficult decisions may become unavoidable, with every stakeholder required to bear a part of the burden until the crisis passes: the central government through duty reductions (which have already been done to the extent possible), state governments through rationalisation of VAT on fuels, and consumers through higher prices at the pump. It is undoubtedly a difficult proposition, but perhaps the only viable path to endure a prolonged crisis.
The longer the war continues, the more inevitable this outcome becomes. The government cannot continue to forego ₹460 crore in revenue every day. The OMCs cannot continue to absorb losses that are eroding their capital base. The only remaining variable is the consumer. The question is not whether fuel prices will rise, but when and by how much. The government has shown remarkable resolve in protecting the consumer. But resolve is not a renewable resource. The day of reckoning is coming.
Questions and Answers
Q1: How did the government respond within eight days of the disruption to protect LPG supplies?
A1: The government issued the LPG Control Order, directing refineries to maximise LPG yields to meet domestic demand (despite being uneconomic under normal circumstances). LPG production was increased from 36,000 MT to 54,000 MT per day, and priority was accorded to protecting supplies for domestic consumers.
Q2: What has been the government’s strategy regarding retail fuel prices despite the surge in global crude oil prices?
A2: The government has shielded domestic consumers from steep price increases by absorbing the burden through reductions in excise duties, while oil marketing companies (OMCs) have borne losses. Petrol and diesel prices have not been increased proportionally to the 80-100 per cent rise in global crude oil prices.
Q3: How much revenue is the government estimated to be losing per day due to excise duty reductions?
A3: Based on excise duty reductions alone, the government is estimated to lose nearly ₹460 crore per day, translating into almost ₹1,68,000 crore annually.
Q4: What was the total loss suffered by the government and OMCs between March 16 and April 30 due to maintaining prices?
A4: The total loss is estimated at around ₹62,000 crore. The central government suffered a loss of around ₹30,000 crore due to excise duty reduction, and the OMCs bore the remaining ₹32,000 crore.
Q5: What does the article suggest as the “only viable path” if the conflict persists?
A5: If the conflict persists, the article suggests that every stakeholder must bear a part of the burden: the central government through duty reductions (already done), state governments through rationalisation of VAT on fuels, and consumers through higher prices at the pump. It acknowledges this is a difficult proposition but perhaps the only way to endure a prolonged crisis.
