Explainer: Why is the LPG price increasing?

The price of LPG cylinders which is revised every month has been on an increasing trend. The cost of a non-subsidized 14.2 kg Indane cylinder in Chennai raised to ₹881 on February 12 which is an increase of ₹147 from the January price. The question asked by many is why is the LPG price increasing at a time when the Brent crude oil price is on a decreasing trend? This article seeks to explain the various factors behind the price rise of LPG.

The retail price of LPG is based on a formula that has various variables – the import parity price (IPP) which is based on international LPG prices, exchange rate of rupee and dollar, local freight charges, bottling charges, marketing firm's margin, dealer commission and GST. The frequently fluctuating variables are the international LPG price and the nominal exchange rate of rupee against the dollar. It is to be noted that it is the state run oil marketing companies that sets the rate of LPG every month.

The international oil price had been on an upward trend during the month of December. It hit a high of $68.91 on January 6, 2020. However, after the corona virus crisis grabbed international attention and with decreasing demand from China, the largest importer of oil and gas, prices of LPG has been bearish.

On the other hand, Saudi Aramco's LPG price (propane price), which acts as the benchmark for the IPP increased to $565 per metric tonne in January, a sharp increase from $440 the previous month. The nominal exchange rate has been hovering around ₹71 - ₹72 a dollar. This has been one of the main factors for increase in LPG prices.

So, will this increase in price affect the poor and the low income groups?

No. The government has said that those getting cylinders through the Ujjwala scheme and those who have not given up the subsidy need not worry about the increase in prices as it would be absorbed by an increase in the subsidy given. For example, the cost of an non-subsidized 14.2 kg cylinder costs ₹858.50 in Delhi, up from the January price ₹714. The subsidy offered would now go up from ₹153.86 to ₹291.48. For the Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.

For those consumers who are not covered by the subsidy, the increase in LPG prices will have an impact on the household budget.

However, the situation is expected to ease with the Saudi Aramco decreasing its propane price to $505 for the month of February. If the rupee doesn't depreciate against the dollar significantly, March could be a better month for LPG consumers.