Why Is LPG So Expensive In 2021?

The oil and gas industry has had a difficult year since the COVID-19 outbreak broke out. Oil fields continued to operate, refineries dealt with massive demand changes (without shutting down for even a day), and fuel retailing (including LPG supply to over 250 million consumers) went on as usual.

However, the current crisis will have a long-term influence on the industry. Because of changes in operating models, travel preferences, accelerating digitization, and finally the need to decarbonize, demand will rebalance in the medium term while declining in the long run. The oil and gas ecosystem will have to reorganize in response to shifting demand patterns, government and regulatory measures, and investor preferences. In simple words, these are some of the reasons as to why LPG prices are fluctuating.

Also Read: Here’s Why We Are Amid Hyperinflation Right Now

The price of LPG in India is set by state-owned oil corporations and is updated on a regular basis. Almost every family in India has access to LPG, which is primarily used for cooking. An increase in LPG prices will harm the general public, as they are the ones who are bearing the brunt of the current market’s growing fuel prices.

The best part is that the Indian government is presently subsidizing the sale of home LPG cylinders to customers. Following the purchase of the cylinder, the subsidy amount is directly credited to the individual’s bank account. The amount of the subsidy varies month to month, depending on changes in the average international benchmark LPG prices plus the foreign exchange rate.

LPG Prices Today

Domestic LPG cylinders increased in price by ₹ 165 between January 1 and August 17. Oil companies allegedly held off on raising LPG prices on August 1 to relieve pressure on the government during the parliament session, according to industry observers.

Following the progressive decreasing of government assistance since the removal of LPG subsidy in May 2020, this is the highest price at which a “subsidised” home cylinder is being offered in the city. At current prices, the Centre is enduring a negligible subsidy, while most consumers are bearing the full burden of high prices. Electric cooking is currently less expensive than LPG cooking.

Domestic cooking gas LPG price on August 18 was increased by ₹25 per cylinder — the second straight month of increase in rates.

According to a pricing statement from oil firms, subsidised LPG currently costs ₹ 859 per 14.2-kg cylinder in Delhi. This is the second month in a row that prices have risen. On July 1, rates were increased by Rs. 25.50 per cylinder.

On August 1, non-subsidised LPG rates were hiked by the same amount, and now subsidised cooking gas prices have been raised as well.

How are the prices determined in India ?

The import parity price (IPP) formula, which is based on international product prices, is used to determine the price of LPG. The contract prices of Saudi Aramco are used as a benchmark in this calculation. Saudi Aramco’s LPG rates, free-on-board prices, maritime freight charges, customs fees, and port dues are all factored into the IPP method.

Before establishing the final LPG retail price in India, local freight charges, bottling charges, marketing costs, margins for OMCs, dealer commissions, and the Goods and Services Tax are all taken into account. Currency changes also have an impact on prices.
The government attributes the increase in Indian rates to the rise in global prices as a result of this weighting of international pricing.

Why LPG Prices are rising ?

The average price of Indian Basket Crude oil went from $20.20 per barrel in May 2020 to $64.54 per barrel on March 2, 2021. Brent crude prices hit a high of $63.77 per barrel on March 2, up from a historic low of $19 per barrel in April 2020.

Butane accounts for 60% of India’s LPG mix, while propane accounts for 40%. As a result, these two’s prices are deemed crucial. Saudi Aramco increased its term contract price to $625 per metric tonne in March, up $20 from February. In March, butane prices jumped by $10 per mt to $595 per mt. Since May 2020, when propane was $230 per mt and butane was $240 per mt, propane prices have increased by 171% and butane prices have increased by 148%.

On the other side, on March 2, the exchange rate was ₹ 73.29 per dollar, down from an average of ₹ 76.23 per dollar in May.

Before local costs such as local freight, bottling charges, marketing costs, margins for oil marketing firms and dealer commissions, and the Goods and Services Tax are added, this dollar-denominated value is converted into rupees. This aids the government in determining the LPG retail selling price.

Every month, the government adjusts the LPG price, based on worldwide pricing and the rupee’s performance versus the dollar in the previous weeks.

Who will the price rise affect ?

Retail customers who have given up the subsidies would be affected by the price hike.

The administration has stated that individuals who get subsidies will be largely absorbed by the increase in subsidies. According to the Centre, the price of an unsubsidized cylinder in Delhi would rise from 714 to 858.50, and the subsidy granted would rise from 153.86 to 291.48. LPG subsidies are available to 26.12 crore of the 27.76 crore retail customers. Similarly, the subsidy for Ujjwala customers would increase from 174.86 to 312.48 per cylinder.

In conclusion, With international oil prices on the rise, it’s likely that LPG prices will follow suit. When international prices fell because to the COVID-19 pandemic, the government removed the LPG subsidy. From May, the government in Delhi and several other states stopped paying a subsidy under the DBTL plan. Because of the current price hikes, the government will have to reinstate the cooking gas subsidy.

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Bhakti Khara
I'm an undergraduate law student who aspires to be the best in my profession. As the daughter of Gujarati businessman, the world of numbers and finance has always piqued my interest. Nonetheless, I learn by knowing, doing and I also learn from the challenges and unrehearsed tasks. As an upcoming corporate lawyer, I believe it would be my responsibility to make you aware about not only the legalities associated with finance but also provide you with a wealth of information about the world of finance, which will fascinate you, as it did me.
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