The average depot price of petrol—the market-determined cost including crude, refining, freight, and taxes—stood at approximately ₹85.8 per litre. Yet retail selling prices remained below this level, creating an average under-recovery of about ₹11 per litre. This gap amounted to roughly ₹21,300 crore in losses on petrol sales alone during this four-month period.
The root cause lay in the West Asia geopolitical crisis that began on February 28, 2026. The conflict triggered a 70-80% surge in international crude prices, with the Indian crude basket reaching a peak of nearly $135 per barrel. At this peak, market-determined petrol prices could have hit around ₹125 per litre. Instead, Indian consumers continued paying ₹94.77 per litre—a massive ₹30.23 per litre benefit absorbed entirely by OMCs.
The Ministry of Petroleum and Natural Gas made a clear strategic choice: prioritize consumer price stability over OMC financial health.
This directive meant that while international crude prices escalated 70-80% since February 2026, domestic retail fuel prices increased by only 7-8% over the same period.
The policy impact was immediate and severe. Combined under-recoveries across petrol, diesel, and LPG reached ₹74,781 crore in Q1 FY27 alone. At the crisis peak, OMCs were absorbing under-recoveries of approximately ₹2,400 crore per day. The financial toll on individual companies was stark—Bharat Petroleum Corporation Limited reported a loss after tax of ₹3,962 crore in Q1 FY27, while Hindustan Petroleum Corporation Limited faced a loss after tax of ₹11,526 crore with negative EBITDA of ₹14,860 crore. Transcripts
Several operational factors converged to create this perfect storm. International crude prices were the primary driver, escalating from $63.87 per barrel in Q3 FY26 to $83.01 per barrel—a 30% increase driven by the US-Iran conflict. At the peak, prices nearly doubled to $135 per barrel. Transcripts
Exchange rate vulnerability amplified the impact. With India importing 85% of its crude oil requirements, every dollar of crude price increase translated directly into higher import costs. Each $1 per barrel increase leads to approximately ₹16,000 crore in annual import bill increases.
Freight costs surged dramatically due to the Strait closure. Shipping companies imposed emergency fuel surcharges, with transport accounting for up to 20% of crude oil prices on some routes due to rapidly escalating charter rates. Route diversions, higher insurance premiums for vessels operating in high-risk regions, and port congestion all added to the landed cost.
The government did provide some relief through excise duty reductions—cutting petrol duty by ₹10 per litre (to ₹3) and diesel duty by ₹10 per litre (to zero). However, this was insufficient to offset the crude price surge and also reduced revenue buffers that could have helped absorb losses.
One crucial mitigating factor was the Ethanol Blended Petrol Programme. OMCs could source domestically produced ethanol at approximately ₹70 per litre, significantly below the crisis-affected depot price of ₹85.8 per litre. This provided a ₹15.8 per litre cost advantage on blended fuel volumes.
The causal relationship between domestic ethanol sourcing and reduced vulnerability operates through physical import displacement, price insulation from international markets, and elimination of exchange rate exposure. During the crisis period, the ethanol buffer likely offset approximately ₹570-915 crore of the ₹21,300 crore petrol under-recovery—representing a 2.7-4.3% direct offset.
While the ethanol buffer's direct impact was limited by blending levels (10-12% during the crisis versus the targeted 20%), the program demonstrated significant strategic value beyond direct cost savings. It provided working capital relief, balance sheet protection, and enhanced operational flexibility during extreme stress.
The ₹74,781 crore combined Q1 FY27 loss has created severe working capital pressures. Bharat Petroleum Corporation Limited saw its debt increase by 62% in just one quarter, rising to ₹17,396 crore by June 30, 2026. Hindustan Petroleum Corporation Limited maintained elevated debt levels of ₹72,597 crore with quarterly interest costs of ₹765 crore. Transcripts
This debt escalation has implications for borrowing costs. Sustained under-recoveries could increase OMCs' weighted average cost of capital by 50-100 basis points, adding approximately ₹375-750 crore in annual interest burden on their combined debt base of roughly ₹75,000 crore.
Credit rating pressures are mounting.
Investment-grade ratings face downside risk if under-recoveries persist beyond Q2 FY27. Transcripts
The financial strain threatens critical investment programs. Indian Oil Corporation had planned ₹32,700 crore capex for FY26-27, with major refinery expansions at Panipat (15→25 MMTPA), Gujarat (13.7→18 MMTPA), and Barauni (6→9 MMTPA) progressing at 87-93% completion. While these near-term projects will likely finish, new investments face significant constraints. Transcripts
Approximately ₹5,000 crore annually directed toward renewable energy projects is at risk. Retail network expansion—IOC commissioned 909 retail outlets in FY25-26—faces constraints as each new outlet requires ₹50-75 lakh investment. Pipeline infrastructure projects like the Mundra-Panipat pipeline may also face delays. Transcripts
The current model of OMCs absorbing under-recoveries without direct compensation faces fundamental sustainability challenges. If sustained, the current loss rate could reach ₹2.5-3.0 lakh crore annually—far beyond what OMC balance sheets can absorb without permanent damage.
Historical context provides little comfort. OMC profits have swung dramatically: ₹80,986 crore in FY23-24, ₹33,602 crore in FY24-25 (when they absorbed ₹40,434 crore in LPG under-recoveries), and ₹77,821 crore in FY25-26. This volatility makes long-term planning nearly impossible.
The trade-off the Ministry is making—prioritizing short-term consumer protection over long-term OMC financial health—creates several risks. Reduced investment capacity could affect India's energy security.
Credit rating downgrades would increase borrowing costs permanently.
India needs a predictable, transparent pricing mechanism that balances consumer protection with OMC viability. Several options merit consideration:
An automatic pricing mechanism with price bands could provide predictability. Base prices would be linked to the Indian crude basket with automatic adjustments when crude moves beyond thresholds, while circuit breakers would allow intervention during extreme volatility.
A stabilization fund mechanism could spread costs across good and bad periods. An initial corpus of ₹50,000 crore built from oil sector dividends could provide automatic drawdown during crisis periods, with mandatory rebuilding when crude prices are favorable.
A gradual deregulation approach with safety nets could phase in market-based pricing over 24-36 months while maintaining targeted consumer protection through direct benefit transfers and essential use quotas.
The immediate priority should be establishing a clear compensation framework for the Q1 FY27 under-recoveries, implementing modest price increases to reduce ongoing losses, and providing government guarantees for OMC working capital borrowing. Without such measures, the financial health of India's critical energy infrastructure companies faces serious jeopardy.
The West Asia crisis has exposed the vulnerabilities in India's current fuel pricing framework. While the Ministry's consumer protection focus is politically understandable, a sustainable solution requires structural reforms that recognize OMCs cannot indefinitely serve as shock absorbers for geopolitical volatility.
