People are very sensitive about fuel prices as they are directly linked to the commodities. Earlier these prices were changed fortnightly based on the average price of crude oil and foreign exchange rate of the preceding 15 days. But from the beginning 16th June last year, all petrol pumps across the country have been changing their petrol and diesel prices each day based on market prices of crude oil (International )and foreign exchange rates. But in many instances, the old pricing systems have failed to change proportionally with the rise and fall in international crude oil prices due to political intervention. So in order to find the need for shifting to daily fuel price change model, one has to understand the dynamics of petrol pricing in India.
Though, the union government deregulated petrol price in 2010 and diesel price in 2014, which allowed oil marketing companies to decide on the prices of fuel, according to the change in international oil prices based on the currency exchange rate. But, the state owned oil marketing firms Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp weren’t allowed to raise prices in the state or national election in order to avoid people’s anger. But to compensate the oil companies, the government allowed them to charge higher prices even when international oil rates have fallen.
Though there is a mix of both private sector companies like Reliance Industries, Cairn India Ltd; and public sector counterparts like Oil India, Oil and Natural Gas Corporation (ONGC) among others in this sector. However, these companies together cater to only 25% of India’s crude oil requirement. 75% of India’s crude oil needs is met through imports. International prices of crude oil and foreign exchange rates form the base components of price of petrol and diesel prices in India. But this forms only a small portion of the retail price of the fuel, the final price is determined by other factors like taxes, duties, cess and dealer margins.
Petrol and Diesel Prices have steadily been increasing after daily price revisions, but it must be noted that fuel price are excluded from GST, but other costs and taxes are included. Here is a sample of how petrol price is calculated.
Charges and Taxes |
Petrol Price |
International Price of Crude Oil + Ocean Freight (as on 13th June 2018) – Dollar price (Rs 67.61) |
75.33 $ or Rs 5093.33 per Barrel |
1 Barrel of Crude Oil |
159 Litre |
Crude Oil - Cost per Litre |
Rs 32.03 per Litre |
|
|
Basic OMC Cost Calculation * |
|
Entry Tax, Refinery Processing, Landing Cost & Other Operational Costs along with Margins |
Rs 2.1 per Litre |
OMC Margin, Transportation, Freight cost |
Rs 3.31 per Litre |
Basic Cost of Fuel after Refining Cost |
Rs 37.44 per Litre |
|
|
Additional: Excise Duty + Road Cess as Charged by Central Government |
Rs 19.48 / Litre on Petrol |
Pricing Charged to Dealers before VAT |
Rs 56.92 per Litre |
|
|
Calculating Dealer Retail Price - Base Location (Delhi) |
|
Commission to Petrol Pump Dealers |
Rs 3.63 per Litre |
Fuel Cost Before VAT (rounded off for approximation) |
Rs 60.55 per Litre |
|
|
Additional:VAT (Varies from State to State - 27% on Petrol & 16.75% on Diesel + 25p as Pollution Cess with Surcharge) |
Rs 16.61 / Lit on Petrol |
Final Retail Price as on 13th June 2018 -(calculation) |
Rs 77.11 per Litre |
With the deregulation, fuel prices will be market-linked. That means if the international petroleum prices rise, customers will have to pay more for buying. But in the old pricing scenario, fuel prices weren’t cut, but they increased the subsidy for oil companies which are around Rs. 63,000 crore. The freeing up (deregulation) of petrol and diesel prices will save the government several thousand crores in subsidy payment this year.
There are many reasons behind the government hesitation to reduce excise duty. Even a single rupee cut in excise duty on petrol and diesel will result in a revenue loss of several thousand crore. When the fuel prices don’t go up, there is no reason for any tax cut. The centre levies Rs 19.48 a litre of excise duty on petrol and Rs 15.33 per litre on diesel. States have a value added tax (VAT), which varies from state to state. The government hopes that fuel prices would come down in a few weeks as the geopolitical tensions across the Korean Peninsula will reduce after a historic summit between the US and North Korea. Experts also predict that US shale gas boom could reduce the crude oil price.
The daily revision system in oil prices can never affect consumers much as international oil prices do not fluctuate daily. Change in prices of petrol and diesel will not affect the commuters.
The price movement will immediately reflect on the account books of oil marketing firms, but greatly help in the long run since there is no need maintain loss or subsidy. Apart from this, it will increase of overall sales of oil marketing companies and improve the share prices. Deregulation also brought private Oil companies Reliance Industries and Essar Oil into retail sale of fuels. For government, low subsidy means they can meet its fiscal deficit target of 4.1 per cent of GDP. The less fiscal deficit will reduce government borrowing and increase spending on asset creation, which will add to economic productivity and positive impact on the rupee.