October 1, 2026: A fuel-price shock begins far from the petrol pump. A conflict involving Iran put the Strait of Hormuz, one of the world’s most important energy corridors, under severe strain. Crude prices surged, shipping routes were disrupted and oil-importing economies faced a familiar question: how much of the shock would reach the consumer?

India had a particular reason to worry. It imports close to 88.5% of the crude it consumes. At the height of the crisis, the Indian crude basket approached $135 a barrel.* Yet the rise in petrol prices was nowhere near as steep as the rise in oil costs. According to figures cited by the government, international crude prices rose roughly 70-80% since February 2026, while domestic retail fuel prices rose by about 7-8%. Delhi petrol was ₹94.77 a litre in February. By July, it had risen to ₹102.12; not unchanged, but a much smaller increase than the rise in crude. The government also estimated that, at the peak of the shock, a market-determined petrol price could have reached around ₹125 a litre.

However, before tackling prices, India had to make sure fuel kept arriving. The price gap itself was shaped by what happened next: a tax cut that eased oil companies’ losses, the costs they continued to absorb, and an ethanol programme built before the crisis.

For a country that buys most of its crude abroad, an oil shock is not only about price. If shipments are delayed or a major route becomes unreliable, refiners must find other cargoes quickly enough to keep supplying petrol and diesel. A stable price on a filling-station board means little if the station cannot get fuel.

India entered the crisis with a broader range of crude suppliers than it once had. By March 2026, the government said it was importing oil from around 40 countries. About 70% of crude imports were arriving by routes outside the Strait of Hormuz, compared with roughly 55% earlier. Refineries were operating at high capacity, some above their rated capacity. Those measures, the government said, helped guard against a shortage; it did not explain why petrol prices rose much less than crude.

Yet it did not necessarily resolve the second problem: the fuel reaching India now cost considerably more.

Then came the price problem 

In late March, the Centre cut a special excise duty on petrol and diesel by ₹10 a litre, reducing the under-recoveries oil companies were absorbing. Pump prices did not fall by ₹10. The government said it used the tax cut to reduce the under-recoveries being absorbed by state-run oil marketing companies, allowing them to keep retail prices unchanged at that point in the crisis. In effect, the Centre gave up tax revenue to ease the burden on companies that were selling fuel below a market-linked price.

The duty cut did not eliminate that burden. The petroleum ministry told Parliament that state-run oil marketing companies incurred about ₹213.00 billion in under-recoveries on petrol during February-March 2026, roughly ₹11 a litre on average. That is a reported loss over a later period, not a second ₹11-a-litre benefit to add to the ₹10 tax cut. The ministry’s published figures do not provide a single like-for-like calculation showing precisely how much of those March-June under-recoveries remained after the duty relief.

Together, the tax relief and the losses oil companies still carried help explain why motorists saw only part of the increase in crude costs, even after Delhi petrol prices rose in May.

And then there was the fuel itself
A third buffer had been built years before the crisis. India’s ethanol-blending programme replaces part of petrol refined from crude with domestically procured ethanol. Government figures put blending at 20% for November 2025 to June 2026, compared with less than 1.5% in 2013-14. The programme was pursued for reasons that went beyond pump prices, including reducing dependence on imported oil and creating a market for agricultural produce.

Its relevance became clearer when crude surged. Oil bought abroad responds to global prices, shipping risks and exchange-rate movements. Ethanol is bought under administered procurement arrangements, so its price does not rise in lockstep with Brent. For the 2025-26 ethanol supply year, the government reported a weighted average ex-mill price of ₹66.61 a litre; its estimated procurement cost to major public-sector oil companies was around ₹71 a litre once GST and transport were included. These are prices paid to procure ethanol, not prices charged for petrol at the pump.

The government made a more specific claim about blending: it said petrol in Delhi would have cost around ₹125 a litre without ethanol when the crude basket reached about $135 a barrel, against the ₹94.77 consumers were paying at that point. It described the difference as nearly ₹30 a litre in savings. But that claim does not, on its own, establish how much of the gap ethanol accounted for: the government had also cut excise duty, while oil companies were absorbing under-recoveries.

Blending reduced exposure to imported crude, but the available figures do not separately quantify its contribution to the pump price. Nor does blending guarantee cheaper petrol in ordinary conditions: ethanol’s cost relative to petrol changes with crude prices, and some older vehicles can see a reduction in fuel economy with E20.

India had developed a domestic fuel component for longer-term energy and agricultural goals. When imported oil became much more expensive, that component offered some protection from the same crude-price shock, though the available figures do not tell us precisely how many rupees per litre of relief to attribute to ethanol alone.

But the cost did not disappear

By July, Delhi motorists were paying ₹102.12 a litre, up from ₹94.77 in February. That was a real increase, even if it was far smaller than the rise in crude. The government had given up revenue through the excise cut, and state-run oil marketing companies had absorbed under-recoveries.

India remained dependent on imported oil, and the pressure continued: reporting citing Petroleum Planning and Analysis Cell data put the Indian crude basket at $123.67 a barrel on September 24. That leaves a different question for the months ahead: how long can the government collect less tax on each litre, and how long can fuel retailers carry under-recoveries if crude stays expensive? Future pump-price increases are one possible way for more of the cost to reach motorists; continued under-recoveries would leave more of it with the companies. The available figures do not establish which path will follow, or whether the government will change course.

As for now, India not only limited how much of the shock reached consumers immediately, it also kept supplies moving and limited how much of the higher cost reached consumers immediately. How those costs are managed if the shock persists is now the harder business question.

(Source: Economic Times)