The Hindu Business Line : Oil price cut decision: Govt on slippery ground

Chennai, Nov. 17 Crude oil prices hit a peak of $147 on July 11. Since then, they have been on a downswing and as on Monday, the rates had dropped over 62 per cent to $55.60 a barrel around mid-day.

In India, prices of petroleum products were raised on June 5 when crude oil prices were ruling over $120 barrel.

Queries on cut in prices of petroleum products of late have been ducked by the Prime Minister, Dr Manmohan Singh, and the Union Minister for Petroleum, Mr Murli Deora. Their arguments are that the rupee has depreciated sharply and oil companies are yet to recover the losses they sustained when the Centre kept the prices of petroleum products at a lower level. How far do these arguments hold?

Comparative picture

A fair comparison of what is happening on the crude front with regard to India as well as the global market can be had from the Brent crude futures being traded on the Multi Commodity Exchange (MCX).

On July 11, when crude oil peaked at $147, Brent crude near-month contracts were quoted at Rs 6,096 a barrel. On Monday, near-month contracts on MCX were quoted at Rs 2,833 a barrel, a fall of over 53 per cent.

During this period, the rupee has slid from 43.35 to the dollar to 49.03 on Monday, a depreciation of 13 per cent.

Even while raising the prices of petroleum products on June 5, the Centre had said the oil marketing companies would still bleed. However, since the middle of September, crude oil prices have been hovering below $100 a barrel.

Tax component

Again, taxes make up a significant portion of the prices customers pay at the retail outlet. For example, in New Delhi, customers pay 17 per cent sales tax on petrol and diesel. At current prices, the tax works out to Rs 8.59 a litre for petrol and Rs 5.96 for diesel.

If the prices of petroleum products were to be revised based on the fall in crude oil prices, then the sales tax component drops to Rs 4.42 a litre for petrol and Rs 4.08 for diesel. Excise duty at Rs 13.35 a litre of petrol works out to 26 per cent of the price paid by the consumer.

Going by the same argument, excise duty should be lower than Rs 6.50 for a litre of petrol. For diesel, the excise duty makes up a little over 10 per cent and at today’s price of crude, it should be less than Rs 2.50 a litre against Rs 3.60 being charged on the consumer.

In a bind

However, there is one catch in the demand for revision. When the Centre raised the prices of petroleum products, it totally scrapped the Customs duty. Now, what could be the prices if the Centre decides to reimpose Customs duty?

But is the Centre pointing fingers at the oil marketing companies just to make up for scrapping the Customs duty? Therein lies the answer for the Centre dragging its feet on the issue of cutting prices of petroleum products.