Retail fuel prices: What the govt must learn from oil marketing firms

One wonders why the govt continues to allow an opaque pricing structure and does not look at taking advantage of reduced crude oil prices to shore up its finances

Brent crude oil prices reached a high of $85 a barrel on October 9, 2018. Since then, they have fallen to about $60 a barrel. This is a 29 per cent drop in about two months. Retail selling prices for petrol and diesel, however, have not seen a similar drop. Petrol prices fell by just 12 per cent and those of diesel were down by 9 per cent in the same period.
 
Are oil marketing companies recovering the losses on their margins, which had come under pressure after the government’s October 4 decision asking them to reduce their margins by one rupee a litre? That seems likely. Remember that even before the October 4 decision, the oil marketing companies had begun informally squeezing their margins to soften the impact of higher crude oil prices on retail consumers. What the government did on October 4 was to increase that squeeze and make that formal.

 
According to data available with oil marketing companies, the cost and freight (C&F) prices for petrol and diesel in the first week of April 2018 were Rs 31.08 and Rs 33.16 per litre, respectively. These prices were calculated on a moving average basis. By October, these C&F prices for both the products went up to Rs 40.69 and Rs 43.9 a litre, respectively. This was an increase of 31-32 per cent.
 

However, the increase in the prices that refineries charged from the dealers in the same period was much lower at 22-23 per cent. The dealers’ April prices of Rs 35.05 and Rs 37.31 a litre for petrol and diesel went up to Rs 42.79 and Rs 46.22 a litre, respectively, by October 1.

 
In other words, the oil marketing companies’ margin, or the difference between the petroleum products’ C&F prices and the price at which they were sold to dealers, had narrowed from Rs 4 a litre in early April 2018 to Rs 2 a litre in October 2018 for petrol, and from Rs 4 to Rs 3 a litre for diesel, in the same period. This also meant that the marketing companies had taken a margin hit of Rs 2 a litre for petrol and Re 1 a litre for diesel in the six months from April to October. The government decision on October 4 had increased that margin pressure by one rupee a litre.

 
The oil market scenario changed from the second week of October with crude oil prices beginning to decline from October 9. By the end of November, the C&F prices for petrol fell to Rs 32.51 a litre, a decline of 20 per cent over the October price of Rs 40.69 a litre. For diesel, the drop was lower at 9.47 per cent – down from Rs 43.9 a litre in October to Rs 39.74 a litre in end-November.
 
However, the price (excluding excise and value-added tax) at which oil marketing companies sell the products to dealers saw a much lower decline – less than 10 per cent for petrol from Rs 42.79 a litre in October to Rs 38.63 a litre in end-November and by less than 4 per cent for diesel from Rs 46.22 a litre in October to Rs 44.52 a litre by the end of November.

 
Note that the difference between the C&F prices and the prices at which the products are sold to dealers has increased quite significantly. In October, these were Rs 2 a litre for petrol and Rs 3 a litre for diesel, without including the government-imposed margin cut of Re 1 a litre. By the end of November, they increased to Rs 6.12 a litre for petrol and Rs 4.78 a litre for diesel. For petrol, the margin almost trebled and the increase for diesel was about 60 per cent. Clearly, the oil marketing companies pocketed a good part of the gain arising out of a fall in crude oil prices.

 
Two questions arise. Why is the government not taking advantage of reduced crude oil prices to shore up its finances? It must learn from the oil marketing companies. When oil prices had touched $85 a barrel, it had not only asked the oil companies to squeeze their margin, but it had also reduced excise duty on petrol and diesel by Rs 1.5 per litre. This had meant a revenue loss of Rs 105 billion in the current financial year. Is it now time to restore the excise duty cut?
 
The government’s revenues from the goods and services tax (GST) are not looking encouraging and a shortfall of Rs 500 billion for the current year is now a possibility. If the government is serious about its commitment to meeting the fiscal deficit target of 3.3 per cent of gross domestic product (GDP) in the current year, it could raise the excise duty on petrol and diesel. Raising the excise duty by Rs 1.5 per litre would help mobilise at least Rs 70 billion from excise duty in the remaining four months of the year and thus reduce the overall revenue loss on this account to only Rs 35 billion in 2018-19.

 
Equally important is the question on the current system followed for petroleum product pricing. Why is it that the government continues to allow an opaque pricing structure for oil products? The oil companies declare in their retail price build-up statements that their C&F prices for petrol and diesel in end-November fell by 20 per cent and 7 per cent, respectively, over what prevailed in the first week of October. Why is it that the Brent crude oil prices fell in the same period by a sharper margin of 30 per cent?
 
The pricing equation gets even more curious when the Indian basket crude oil prices are shown to have dropped by even a lower margin of 18 per cent in this period. The differences could be partly explained by the averaging of the C&F prices and Indian basket crude oil prices, while the Brent crude oil prices are calculated on a daily basis. Nevertheless, it is time the government and the state-owned oil companies got together to bring in greater transparency to the entire petroleum product price determination exercise.