Why the price rise in petrol, diesel is justified

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.

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.

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.

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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