For six months the prices of petrol, diesel have remained unchanged, resulting in heavy losses for refiners
Ever since the start of the Ukraine war in February 2022, the international price of oil has been on the boil. Considering that India imports 85 per cent of its oil requirements, this is bound to impact the domestic price of petroleum products (POL). But the Modi government has ensured that the retail price of petrol and diesel have remained unchanged for a record six months.
Around 90 per cent of the domestic fuel retail network in the country is controlled by the three Central public sector undertakings (CPSUs) namely, Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), which are majority owned and controlled by the Government of India (GOI).
The trio source their requirement of petrol and diesel from their own refineries (the crude oil needed for processing to make refined products - including petrol and diesel - is largely imported even as a portion or 15 per cent is drawn from domestic upstream oil & gas companies such as ONGC, Oil India Limited or OIL, etc.) as well as imports. They fix the retail price as refinery-gate price or RGP plus freight, marketing costs, marketing margin, dealers’ commission and taxes and duties. RGP is arrived at by taking import parity price (IPP) and export parity price (EPP) of the fuel in the ratio of 80:20.
When the international price of oil goes up, RGP increases and vice versa. If the companies strictly follow the formula then the retail price of petrol and diesel should increase under an escalating global price environment. But this rarely happens. Prior to 2002-03, under an administered price regime (APR), the trio were required to sell petrol, diesel (besides kerosene and LPG) at prices below the cost of supply. The losses on sale of these products were cross-subsidized by surpluses generated from the sale of naphtha, fuel oil, LSHS and aviation turbine fuel (ATF) to other industries at prices much higher than costs.
In 2002-03, based on recommendations of the Vijay Kelkar Committee, the then NDA government dismantled the APR. Even as it continued the sale of the products at prices lower than the cost, it vowed to reimburse the difference as a subsidy from the Union Budget. Instead, the UPA government (it took charge in 2004) directed ONGC and OIL to offer a discount on supply of crude to the refiners so that the latter could sell at a low price at the pump sans budget support. Yet, they faced a deficit which was met by oil bonds issued during 2005-2010.
Beginning 2016-17, the Modi government discontinued the policy of selling domestic crude at discount. Meanwhile, petrol was deregulated in June 2010 and diesel in November 2014 implying that the GOI doesn’t pay any subsidy to the three refiners to make up for the losses that result from selling fuel at rates below cost.
If oil PSUs don’t get compensated for selling below cost, why should they not sell at the cost-based price? After all, both petrol and diesel are decontrolled and de jure the companies are free to fix the price as per the formula. The problem lies in their public character. By virtue of this, they have to follow the orders of their bosses sitting in the ministry even if these are given verbally. In this backdrop, look at this scenario:- The price for the basket of crude oil that India imports on an average basis increased from around $90 per barrel before to Ukraine war started to $103 per barrel in April, 2022; $109.5 per barrel in May, 2022; $116 per barrel in June, 2022; $105.5 per barrel in July, 2022; $97.4 per barrel in August, 2022 and $90.7 in September, 2022. The average for April–September, 2022 was $ 103.7 per barrel.
Yet, the retail price of petrol and diesel continues to be fixed using a crude benchmark of $90 per barrel (courtesy, instructions from the political brass). Corresponding to this benchmark, the price of petrol in Delhi is `97 per liter much lower than it should have been on the basis of much higher crude price that prevailed (for instance, with respect to crude at $116 per barrel, the under-recovery would be `15 per liter). As a result, the three refiners incurred a loss of around Rs 40,000 crore during the first half of current financial year
Even as CPSUs were hoping that international price would decline thus enabling them to recuperate the above loss, their hopes have been dashed due to the decision on October 5 of the OPEC (Organization of Petroleum Exporting Countries) – a cartel of oil producers which decides on supply quota by member countries – to cut production by two million barrels a day.
Already, the Indian crude basket has gone up from $84 per barrel in September end, 2022 to $ 92 currently and the escalation will continue. The losses will mount for the refiners, affecting their investment plans. It will further hamper the prospects of finding a good buyer for BPCL whose privatization has been deferred for want of suitors (initially planned for 2019-20, finally it was to happen during the current year)
Having allowed oil firms the freedom to set prices of petrol and diesel, in sync with international prices, the government must not interfere. As for reining in the price to consumers, there is a need to focus on four things. First, it should craft its purchase strategy to get the best price. Already, by maintaining an independent stance on the Ukraine crisis, Team Modi has managed to buy crude oil at a lower price (the share of Russian crude albeit at discount is up from a mere two per cent to 20 per cent). These efforts should be continued.
Second, during the last one year, the GOI has reduced central excise duty (CED) by `13 per liter on petrol and `16 per liter on diesel. Today, the CED on these fuels is `20 per liter and `16 per liter respectively. There is a lot more scope to reduce as in 2014, CED was `9.5 per liter on petrol and `3.6 on diesel. The States too should reduce VAT (value added tax).
Thirdly, the refiners have an in-built cushion in setting RGP. Import of petrol and diesel attract higher customs duty at 2.5 per cent against ‘nil’ on import of crude. As a result, they get a fortuitous gain to the extent the product is sourced from their own refineries. Depreciation of the Rupee multiplies this gain. There is an added cushion due to ocean freight, insurance and port charges which are included in the IPP but not incurred. All this can be passed on to consumers. Four, there is an urgent need to remove all bottlenecks in the way of increasing domestic production of crude to reach at least 25 per cent in the next three years and 50 per cent by 2030.
(The author is a policy analyst)
