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Fuel price: are we being taken for a ride?

Oil firms cite high crude prices and fall in the value of the rupee as the main reasons for increasing domestic fuel prices. But there is more to it, writes Anupama Airy.

business Updated: Dec 25, 2013 01:40 IST
Anupama Airy
Anupama Airy
Hindustan Times

Why are prices of petroleum products frequently hiked?
Oil firms cite high crude prices and fall in the value of the rupee as the main reasons for increasing domestic fuel prices. They are free to adjust petrol prices, but diesel, LPG and kerosene pricing are controlled by the government.

Why do domestic prices of petrol and diesel fluctuate?
Petrol and diesel are derived by refining crude oil. As India imports 80% of its crude oil needs, any fluctuation in global oil prices has a direct impact on the prices of fuels.

What are import and export parity pricing models?
Import parity price or IPP is defined as the price that the oil companies would pay for the landed cost of imported goods: the total cost of the crude oil including tariffs, duties and transportation costs up to the purchaser’s location.

Export Parity Price or EPP is the price that a producer gets or can expect to get for his product if it is exported, equal to the freight-on-board price minus the costs of getting the product from the factory to the border.

What model does India follow?
India is a net importer of crude oil, but it is a net exporter of petroleum products due to its huge refining capacity. Therefore, the actual pricing of petroleum products is a mix of 80% of IPP and 20% of EPP. This is termed trade parity pricing (TPP), and is the model our oil refiners use to calculate the price of petroleum products.

Is the pricing model of state-owned oil companies faulty?
Indeed it is. Although petroleum products are produced at refineries in India, oil companies price them in line with global markets, which means that the cost of petrol and diesel, despite being produced in India, are benchmarked with that of imported petrol and diesel. The IPP is converted into Indian rupees, and a weak rupee adds to the cost.

To this imported fuel price, oil companies add other charges such as marketing costs and margins, inland freight and delivery charges besides taxes and duties, which takes the fuel much costlier than it actually is for an oil company.

What does under-recovery on petroleum products mean?
In India the retail price of petroleum products except petrol and ATF are regulated by the government, and are much lower than the TPP. The gap between the TPP and the government controlled price is called under-recoveries, or losses to oil companies.

Is under-recovery a real loss to oil companies?
Under-recoveries of oil companies on sale of a particular fuel are not the real but notional losses that are exaggerated due to inclusion of charges and duties that are part of the pricing but are not actually paid. So under-recovery is not a real loss to the oil companies.

Is the aam admi paying to keep oil firms profitable?
About 25% to 30% of what you pay for petrol goes to the government as taxes and duties. Although the Centre does not put out numbers, conservative estimates suggest that half the excise duty collection in the country is from petroleum products.

A Rs 1 cut in excise duty on petrol results in a revenue loss of about Rs 4,000 crore — equivalent to 10% of the outlay for the rural employment guarantee scheme — and reduces the government’s ability to spend on welfare schemes and other heads.

What should India’s fuel pricing policy be?
The finance ministry has proposed auto and cooking fuels should be the priced on EPP, as India is a net exporter of petroleum products. This will benefit both consumers and the government, as being lower than the existing TPP, it will bring down the pump price of the fuel and at the same time lower the subsides burden of the exchequer.

First Published: Dec 24, 2013 23:55 IST