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Explained: Why was there a fuel shortage in India this month?

This month, multiple cities across the country witnessed petrol pumps rationing supplies or getting shut due to non-availability of fuel, leading to concerns about fuel shortages and triggering panic buying among consumers. The situation peaked around the middle of June, forcing the government to intervene and ask petrol pumps to stay open and directing oil marketing companies to ensure fuel availability. The Ministry of Petroleum and Natural Gas also made an announcement that there was enough fuel in the country. The situation has eased since then, and the availability of fuel is likely to return to normalcy from July.

What’s behind the fuel shortage in India?

As crude prices increased globally and the value of the rupee depreciated simultaneously, oil marketing companies such as state-owned HPCL, BPCL and private companies Nayara Energy and Reliance started to report losses on retail sales. The situation at IOCL, however, was comparatively better since the company was able to import cheaper oil from Russia.

Since losses were mounting, downstream oil companies tried to reduce supply to petrol pump vendors to limit losses. This led to fuel shortages at various petrol pumps across the country.

IOCL, however, could maintain its supply, which helped them further increase their market share.

The government, in response, asked petrol pumps to stay open and keep providing fuel to consumers. In a statement on June 15, the government acknowledged the problem, and said fuel shortages have been noticed in Rajasthan, Madhya Pradesh and Karnataka. It blamed the scarcity on a surge in demand — the spike was as high as 50 per cent during the first half of June 2022 over the corresponding period of last year. The government added that these were states where large quantities of fuel was being supplied by retail outlets belonging to private marketing companies and where the distances from supply locations — i.e. terminals and depots — are longer. The government assured that the production of petrol and diesel in the country was more than sufficient to take care of any demand surge.

India has about 81,700 retail fuel stations, and about 7,200 of them are owned by private companies.

Why was there a bigger problem in areas with more retail outlets by private oil marketing companies?

While the prices of petrol and diesel are decontrolled, which means that theoretically their rates are decided by the market, there is an invisible hand of the government on the way the rates move. A case in point is the petrol price movement during the past three months in Delhi – it rose 3.54 per cent in April, fell 8.24 per cent during May on account of excise duty cut, and has remained unchanged during the month of June.

The rise in crude prices and depreciating rupee during the period led to losses to oil marketing companies.

Industry estimates suggest that at current levels, oil companies are losing Rs 25 per litre on diesel and Rs 10 on petrol, when sold through retail outlets. Many private oil marketing companies, hence, stopped sales through their retail outlets leading to shortage.

Some public sector oil companies also reduced supply to dealers to cut their losses by discontinuing or restricting the fuel offered on credit to pump owners, thus, impacting their fuel lift. Indian Oil is learnt to have continued with the credit system.

Industry players blame the current situation on a freeze in oil prices. “The current situation is due to regular intervention of MoPNG (petroleum ministry) in working of OMCs, and electoral freeze of the petroleum price for more then 150 days has resulted in under recoveries to OMCs,” said Hemant Sirohi, a member of the Empowering Petroleum Dealers Foundation, and a petrol pump owner in Meerut.

When will the situation ease?

The solution to the problem lies in raising retail petrol and diesel prices to ensure oil companies do not lose money, but that may not happen soon. The government ought to keep inflation under control, and high fuel prices could have a cascading impact in its fight to rein it in.

Oil companies, however, have raised jet fuel and rates for bulk purchasers that would help offset some of their losses, but that may not be enough.

Industry experts say invoking Universal Service Obligation (USO) may not be able to address the problem in totality. “Simply invoking USO will not help in availability of product at retail outlets, since private companies post USO have increased the price at their outlet. It will be interesting to see how BPCL/HPCL proceed further during weekly holidays, since in the past, supplies without advance payments were not released leading to a dry-out situation across states,” a dealer said.

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The situation may start to ease next month, as the monsoon will reduce fuel requirements for sectors like agriculture.

Meanwhile, BPCL shut half of its crude processing capacity at its 240,000 barrels per day (bpd) at a refinery in Mumbai from June 10 to carry out maintenance. This, however, is unlikely to impact fuel availability in a major way, as these maintenance runs are planned and any shortage is compensated for by other oil refiners.

An e-mail sent to the petroleum ministry and queries sent to IOCL, HPCL and BPCL did not elicit responses.

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