Petrol Price Hike In India Essay

After hitting a three-year high on Monday, the petrol and diesel prices are on rising streak as the crude oil price continue to rally on the back of global geopolitical risks, higher demands and production cuts. The petrol price in Delhi today is Rs 71.27 per litre and diesel price in Delhi is Rs 61.88 per litre. In other metro cities, too, the prices have risen.

The petrol price in Mumbai today is Rs 79.15 per litre and diesel price is Rs 65.74 per litre. The petrol and diesel prices in Chennai today are Rs 73.89 per litre and Rs 65.23 per litre, while in Kolkata the prices for petrol and diesel are Rs 74 per lire and Rs 64.54 per litre.

The impact of excise duty cut of Rs 2 per litre on retail fuel, announced in October, has been completely or partially reversed due to the steep rise in the crude oil prices. Just before the excise duty cut, the petrol price in Mumbai was Rs 79.99 per litre. Since the Brent Crude oil price is continuously rising, and is even expected to touch $80 per barrel, the fuel price in India is going to rise further, unless there is government intervention.

While Brent crude oil price at $70 per barrel is highest since December 2014, the petrol price in Delhi at Rs 71.27 per litre is highest since May 2014, as the central government on the back of low crude oil price three-year windfall, hiked excise duty on both petrol and diesel by Rs 12 per litre and Rs 13.77 between April 2014 and October 2017. A Rs 2 per litre cut was announced on October 3, 2017.

According to reports, oil ministry recently indicated that the government may review the excise duty being levied on retail fuel when, and if, crude oil price touched $75 per barrel. Since October, Since October 4, the Brent crude oil price has gone up from $55 per barrel to $70 per barrel.

As the Brent crude oil price is expected to rise further, one can expect petrol and diesel prices to go up as well — not quite pinching after daily revision kicked in, which allowed hike in prices in few paise every day, instead of big hike fortnightly.

Why oil is on the boil

The rising crude oil price is likely to upset the fiscal math of Finance Minister Arun Jaitley. The oil rice escalated nearly $15 in just three months.

Moreover, it is further going to push up the inflation, which has already breached Reserve Bank of India’s 4% target. With rising oil prices, the repo rate cut by the central bank also looks unlikely, further impacting country’s investments and production cycle.

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The sharp increase in the price of petrol and diesel since June 16, when ‘dynamic’ daily pricing for these fuels was introduced, has caused much angst, forcing an explanation out of the Oil Minister on Wednesday.

The price of petrol sold by Indian Oil in Delhi has gone up from ₹65.48 on June 16 to ₹70.38 a litre on September 13 – an increase of 7.5 per cent. The price of diesel in Delhi has gone up from ₹54.49 a litre on June 16 to ₹58.72 – an increase of 7.8 per cent. The story is similar in other cities too.

Is the price increase justified or are the oil marketing companies using the too-little-to-be-observed daily price changes to line their pockets?

Prima facie, the price increases seem justified. Between June 16 and September 13, the cost of crude oil (Indian basket) has risen nearly 10 per cent – from about $48.4 a barrel to $53 a barrel. In rupee terms, the cost of the Indian crude oil basket has risen a lower 9 per cent; this is thanks to the 0.5 per cent appreciation of the rupee from 64.4 a dollar on June 16 to 64.1 a dollar on September 13. So, going by this, the price increase in petrol and diesel has been lower than the price increase in crude oil.

But this does not tell the whole story. That’s because the price of petrol and diesel in the country are not determined by the actual costs incurred on crude oil sourcing, refining and marketing.

Parity prices

Rather, a formula — trade parity price (TPP) — is the starting point for pricing these products. TPP is the weighted average of import parity price (IPP) and export parity price (EPP) with weights of 80 and 20 respectively.

IPP is the price importers would pay in case of actual import of the product at Indian ports, while EPP is the price oil companies would realise on export of the product. In short, the pricing assumes that 80 per cent of the petrol and diesel is imported and 20 per cent is exported. The IPP includes costs such as free-on-board price, ocean freight, insurance, customs duties and port dues. EPP that accounts for the assumed 20 per cent exports considers free-on-board price. Essentially, the TPP is determined based on prices for these products prevailing in the international market.

The TPP which is quoted in dollars is converted to rupees. To this is added the cost of inland freight, marketing costs and margins charged by the oil companies, the dealer commission and finally the heavy taxes levied by the Central and State governments.

Rupee vs dollar

On June 16, the TPP of petrol was $60.87 a barrel and this went up to $65.48 a barrel on September 13 – that’s an increase of 7.6 per cent. The rupee appreciated about 0.5 per cent in this period, and taxes, while high, remain unchanged – excise duty remained at ₹21.48 a litre of petrol while value added tax (VAT) in Delhi stayed at 27 per cent.

In short, the 7.5 per cent rise in the price of petrol in Delhi between June 16 and September 13 is almost the same as the 7.6 per cent rise in the product’s TPP during this period. Similar, is the case of diesel. While this seems fine, problems still remain.

Not so transparent

One, the dynamic daily pricing is not quite the transparent mechanism it is claimed to be.

Consider this. From June 16 to June 30, the TPP of petrol remained at $60.87 a barrel and the rupee traded the same at 64.42 a dollar, as per Indian Oil price build-up calculations. Likewise, for the entire month of July, the TPP of petrol was $56.27 a barrel and the rupee was at 64.46 a dollar.

For half of August, the TPP was $60.11 a barrel while for the other half, it was at $64.62 a barrel. And in September so far, the TPP is $65.48 a barrel.

When the pricing is being done daily, how is it that the TPP and the value of the rupee, and by extension the refinery transfer price, remain constant for extended periods?

Rather than showing the daily changes in the TPP and the rupee values, the oil companies are adjusting price differences in the daily prices charged to dealers. This gives the impression that the amount is going unfairly into the oil companies’ coffers.

The oil companies will do well to be show the correct TPP and the rupee values to dispel doubts.

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