All about Fuel Pricing - VISION

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Wednesday, December 16, 2020

All about Fuel Pricing

 What is the issue?

  • Petrol and diesel prices hit a two-year high in mid-December 2020. Petrol is well above Rs. 80 a litre while diesel is getting there.
  • The fact that crude oil - the fountainhead of these fuels - is still below 2018 levels highlights the role of petrol and diesel pricing policies of the government.

What is the fuel pricing mechanism?

  • The price of petrol and diesel in India is not determined by the actual costs incurred by PSU refiners.
    • These include crude oil sourcing, refining and marketing costs incurred by Indian Oil, HPCL and BPCL.
  • Rather, a formula named the trade parity price (TPP) is used to price these products.
  • It assumes that 80% of petrol and diesel is imported into India and 20% is exported.
  • So, petrol and diesel prices in India are determined based on prices of these fuels in the international market and not on the basis of crude oil prices.
  • The international petrol and diesel prices generally move in line with crude oil prices.
  • But it need not always be the case, given that demand and supply dynamics could be different.
  • The TPP in dollars is converted to rupees. Then comes other costs and margins of the oil companies, dealer commission and taxes.
  • From mid-June 2017, the pricing of petrol and diesel is done through a ‘daily pricing’ mechanism, based on a 15-day rolling average international rate.
    • So, time lag has an effect too.
  • Further, the weakening of the rupee against the dollar over the years has added to the fuel’s cost.

What role do taxes play?

  • Petrol and diesel are government’s good source of revenue.
  • During the crude crash earlier in 2020, a cash-strapped Centre raised excise duty on petrol and diesel by Rs. 13-16 a litre.
  • Many States too increased their sales tax/VAT.
  • But when oil prices started rising, the taxes were not rolled back.
  • So fuel prices increased, and customers bore the brunt.
  • Notably, taxes now account for about 60% of the fuels’ price.
  • Besides pricing mechanism and taxes, there are unexplained pauses to price changes, leading to opacity in pricing.
    • E.g. For more than 80 days between March and June 2020, the fuels’ prices were frozen when they should have actually fallen.

What are the concerns?

  • India imports most of its oil needs but is more than self-sufficient in petrol and diesel production.
  • So, the trade parity pricing mechanism has often been criticised, especially since petrol and diesel are ‘decontrolled’ fuels.
  • The complaints include allegations of cartelisation with the three PSU oil companies charging nearly the same price, despite different cost structures and efficiencies.
    • Cartelisation means a group of industry participants coming together to fix pricing of products and services. This may work against the interest of consumers.
  • Transparent pricing, based on market principles, will likely help consumers more.

What is the significance?

  • Higher petrol and diesel prices don’t just mean higher personal transport costs.
  • They could also cause a price spike in a host of goods and services, given that these fuels play a big part in running the economy.

 

Source: BusinessLine