The Hindu Business Line : Price for fuel is real, but its cost is only a statistic

WHEN an emperor struts around, he doesn't want to see anything other than bowed heads and mutters of praise. To say anything about his new clothes would be inappropriate. Something similar was played out a couple of weeks ago when an oil company major convened a meeting to explain to the `national media' how prices are determined.

It lasted about two hours and what was easier to understand was the lunch that concluded the occasion, though I'm sure a few would have felt guilty of adding to the woes of a company that was already whining about losses for every litre of fuel it was selling.

To be fair, the whole mechanism of price fixing has a lot of historical baggage in it, and also numbers that have been handled by too many to retain any sanctity. So, we listened to the harangue punctuated by PowerPoint slides that explained the components of price, movement of actuals within the permitted price band and so on.

Rs 24.16 paid per litre of diesel in Delhi and Rs 36.81 for petrol were broken up in a pie chart that showed further break-up. For diesel, landed cost made up 65 per cent, excise duty 14 per cent, and sales tax 11 per cent. Freight equalisation, marketing cost, marketing margins, inland freight, and dealer commission ranged narrowly within 2 to 4 per cent.

Likewise, petrol price had 43 per cent as landed cost, 34 per cent as excise duty and 16 per cent as sales tax. That's 93 per cent of what one pays for the fuel, and the other cost components account for the rest. With the latest announcement of duty reduction, to rein in inflation, there would be some change in the above numbers.

Landed cost was explained as carriage and freight, insurance, Customs duty, bank charges, ocean loss, and wharfages. That's something you would have learned in your graduate course. Ex-storage point price takes off from there and adds to landed cost, the following items: weighted average freight equalisation factor, stock loss and return on working capital, marketing cost and marketing margins. RSP or retail selling price piles on top of the number thus calculated, freight from refinery to inland storage points, excise duty, sales tax and dealer commission.

That's all fine; but just as nobody believes accountants' numbers, an accountant too normally takes no number at its face value. So, it was logical for me to attempt to elicit further details from the company about how the landed cost itself was arrived at, and also when the last updating happened for the individual cost of items. But that drew no response. Simply put, we're dealing with a black box.

At the end of refuelling, your wallet is lighter, and so the price you pay is real; what about the cost that we are told it takes for companies and government to make the fuel available at the bunk? In truth, it's not real.

Rather, it's a statistic; and you know that quote already. It's not a number that can be defended which is why we are better kept in the dark as to its DNA. There's no seal of independent verification to bank upon. Period.

You don't have to be a rocket scientist to know that nobody is really interested in fuel prices going down except consumers. Put yourself in the shoes of the government and if you're getting tax on the basis of ad valorem, there is little incentive to reduce the price. Also, it would be foolish for consumers to expect charity from oil companies.

I would be happy if somebody published the retail prices per litre of petrol and diesel across the world, so we can at least feel proud we are among the top, though not in medals tally.

Also enlightening would be a simple table that shows how much has been contributed over the years by these fuels to the kitties of the Centre and the States; this would make us puff our chest at the extent to which we have subsidised the government's wasteful expenditure elsewhere.

E&OE@thehindu.co.in

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