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Petrol Pricing in India

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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.

Political interference

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.

India's petroleum dependency

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.

Fuel price calculation in India

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

Why fuel prices was deregulated ?

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.

Why govt is not reducing excise duty?

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.

Conclusion

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.

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