The Global Picture: More Oil in the Market
On the international stage, the flow of crude oil has been expanding. Major oil-producing groups, including key OPEC+ nations, have been gradually increasing their output quotas. For August 2026, a collective of seven countries, including Saudi Arabia
and Russia, agreed to raise production by nearly 188,000 barrels per day. This is part of a broader trend of unwinding previous production cuts, a move designed to stabilize the market. Additionally, non-OPEC producers like the U.S. and Brazil have also ramped up their supply. Forecasts from bodies like the International Energy Agency (IEA) and investment banks suggest a potential global oil surplus, with supply expected to outpace demand. This growing supply has put downward pressure on international crude oil prices, with benchmarks like Brent crude falling from their peaks seen earlier in the year.
The Journey From Crude Barrel to Fuel Nozzle
When global crude prices fall, it’s natural to expect a corresponding drop at the pump. However, the price you pay is the result of a long journey with many added costs. Indian oil marketing companies (OMCs) buy crude oil on the international market in U.S. dollars. This means the rupee-dollar exchange rate plays a crucial role; a weaker rupee makes these imports more expensive. After purchase, the crude is shipped to India, refined into petrol and diesel, and then transported to fuel stations across the country. Each step—shipping, refining, and logistics—adds to the base cost. Finally, the OMCs add their marketing margin, which is the profit they make on each litre sold. This margin can fluctuate as companies balance their books against market volatility.
The Great Indian Tax Bite
The single largest factor determining the final retail price of fuel in India is taxation. Both the Central and State governments levy significant taxes on petrol and diesel. The Central government imposes a fixed excise duty on each litre. As of early August 2026, there have been several revisions to these duties, which include basic excise, special additional excise duty, and cesses for infrastructure and development. On top of this, each state government imposes its own Value Added Tax (VAT). Unlike the Centre's fixed duty, VAT is typically an ad-valorem tax, meaning it's a percentage of the price. This creates a cascading effect: when the base price (including central taxes) goes up, the state's VAT collection also increases.
A Tale of Two Taxes: Centre vs. States
The tax structure leads to vast differences in fuel prices across the country. States with higher VAT rates have significantly more expensive fuel. For example, as of June 2026, Telangana's VAT on petrol was around 35.2%, while Delhi's was 19.4%. This is why fuel is considerably cheaper in some states and union territories like Andaman and Nicobar compared to others like Andhra Pradesh or Kerala. Petroleum products were kept outside the Goods and Services Tax (GST) regime precisely because they are a huge source of revenue for both central and state governments. For some states, taxes on fuel can constitute up to 30-40% of their total tax revenue, making them reluctant to lower rates even when the Centre urges them to.
Why Prices Remain Stubbornly High
Even with expanding global supply, the final price you pay in cities like Delhi, Mumbai, or Chennai remains largely a function of domestic fiscal policy. As of early August 2026, petrol prices in major Indian cities hover well above Rs 100 per litre. Governments, both at the Centre and in the states, rely heavily on the revenue from fuel taxes to fund welfare schemes, infrastructure projects, and manage their fiscal deficits. While the central government has occasionally reduced excise duty to provide relief to consumers, these cuts often come at a significant cost to the exchequer. Ultimately, the need for tax revenue often outweighs the political pressure to lower fuel prices, creating a sticky price situation for consumers regardless of global oil market trends.
