As oil prices rise once again, let us discuss what we can learn from historical petrol, diesel prices in India and the associated inflation. Petrol or Diesel prices in India is a touchy subject. While citizens (most users will be part of great, wide Indian middle class) feel angry about the huge taxes that they need to pay on fuel, the government argues that such revenue is essential for it operates and fund growth.
This is a never-ending argument. The essential point that we need to be aware as money managers is, since 80% of our fuel requirements are outsourced, we are at the mercy of not only international market sources but also the strength of our currency. To add to this, we have had a history of subsidies in all aspects of life. It is only in the last few years (across governments) India has a solid plan to become subsidy-free. So there is not much point in cribbing as it is a necessary price to be paid for previous sins from both parties (us and them).
While naturally many are worried and angry about the recent increase in fuel prices, a bigger sore point was the multi-fold increase in excise duty when fuel prices plummetted in late 2013. This meant that we never directly got the benefit of low oil prices. Comparatively, the recent increase is a tamer market-linked increase.
As we shall see below, long-term fuel inflation has been high, but reasonably stable (that is like saying I am a terrible person, but at least I am consistent!). Going forward, the biggest threat to deviations from past inflation seems to be political uncertainty, wars and dwindling oil resources more than anything else. So let us get started. All data sources are linked at the bottom of the article.
Historical Petrol Price per litre in India
Five-year inflation in Petrol Price
Each point is a 5 year annualized (year on year) increase in petrol prices over 5 years periods from 1989. There are 66 such data points as seen from the top right of the graph. Though prices remained high, inflation was zero or lower up to just a few months ago. Did we rejoice then?
Over 5 year periods petrol prices have seen a huge variation in inflation. So it is hard to think of an average.
Ten-year inflation in Petrol Price
Fifteen-year inflation in Petrol Price
The 10,15-year inflation values are about 6-8%. Of course, this is a point to point change and will not reflect fluctuations in the middle. Let us compare this with 10-year data for the US.
Petrol (gasoline) price per litre in USD along with 10-year inflation
The data is sourced from energy.gov and as pointed out here, the sudden spike in oil price in the 1980s is because of US sanctions again Iran that was removed and reimposed again and again since then! Although the price and inflation reflect the crude oil price movements, political uncertainty of the US-Arabia relationship has resulted in a higher long-term inflation volatility than in India. The US only pays about half of what India pays per litre of petrol but the inflation has much more uncertainty.
The 5-year US-fuel inflation also has a similar trend – stable up to the 1980s and then big spikes. Going forward will there be no mean to revert to? Do 50+ US citizens notice an upward shift in inflation in the last few decades? Although the US retail inflation data does not reflect that. Wonder if that is as non-representative as our index!
As for India, have we been thrust into a volatile era even before we could find our 5Y or 10Y mean? I sure hope not.
Historical Diesel Price per litre in India
Five-year inflation in Diesel Price
Ten-year inflation in Diesel Price
Fifteen-year inflation in Diesel Price
Notice that long-term diesel inflation is about 1% higher than that of petrol although the price itself has always been lower. I do not know why (inflation is higher).
Lessons from fuel price history
We must expect petrol or diesel prices to increase at about 6-8% “over the long term” with some big shocks in between. The biggest risk with fuel inflation is that practically all goods and services depend on transport directly! Meaning if the long-term inflation in our fuel is 6-8%, businesses will jack up prices by at least 8-10% more to survive. This means our long-term inflation will be at least 8% (perhaps more if fuel price uncertainty becomes higher).
This is the US consumer price index. Notice the sudden change in slope when oil prices increased.
If fuel prices fluctuate a lot in the short term, businesses cannot afford to lower prices as fast. So overall inflation will remain at a steady high.
For those who understand the impact of inflation, the solution should be clear. Invest in such a manner so that the net portfolio return after tax is higher than past long-term inflation estimates. Inflation over the short term is much higher, but that is not easy to beat unless you are willing to take on credit risk via debt mutual funds. As long as you are earning, such inflation will not impact you much. It is only when the salary stops either by choice (of yourself or employer!) or due to age, will it start to pinch. The time to prepare is now.
When oil prices increase, it often triggers an increase in something else too. Many people are happy when this happens when they should be fearful. We will consider that in the next post.
1: IOCL Website From 2002 onwards
2: Reuters 1989 -2002 (New Delhi)