Do Airtel, Vodafone and Idea charge their subscribers identical tariffs across the country? No. While some of their plans may appear similar, they charge different tariffs based on their own costs and strategies.

Have you at any time seen Indigo, SpiceJet and Jet Airways quoting the same fares for flying to a particular destination at a given time? Certainly not; their fares vary widely.

Do HDFC and ICICI Bank charge the same interest rate with identical terms for housing loans? No. They may have the same published rate but they have different plans for different customer segments.

Why then should Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) charge the same prices at their pumps for petrol and diesel? Aren’t they different entities and why are they not competing with each other like the telecom, airline and housing finance companies? Worse, why do they coordinate their price increase or decrease announcements? The answers to these questions lie in the unfinished part of reform of the oil industry which is setting the national oil companies free and unleashing competition between them on the one hand, and with private retailers such as Reliance Industries, Essar and Shell, on the other.

Coordinating prices

Periodic price adjustments in tandem — such as the one last week when petrol and diesel prices were increased by significant margins —would be seen as cartelisation behaviour if IOC, BPCL and HPCL were private players and not government companies. After all, the three together account for 98 per cent of the market for transportation fuels and dominate their private peers.

The Competition Commission of India (CCI) was quick to notice the cartel-like actions and even conducted an investigation of their collusive behaviour a couple of years ago. But the oil companies went to court arguing that the CCI had no jurisdiction over them as they had their own regulator, the Petroleum and Natural Gas Regulatory Board. CCI Ashok Chawla was quoted a few months ago as saying that he believed that the act of the three PSUs adjusting prices in tandem was anti-competitive. And yet, CCI has been unable to make much progress in reining them in, not entirely due to the court case but also the fact that the government owns these companies.

The practice of coordinated price adjustments is a continuation of the pre-deregulation era when the government set fuel prices for the national oil companies. In today’s deregulated era there is really no reason why the PSUs should coordinate pricing action. They have their own cost structures and margins dictated by their refining capacities, distribution network, retail outlets, staff strength and other items of cost.

For instance, IOC has 10 refineries that process a total of 66 million tonnes of crude oil per annum. It has close to 24,000 retail outlets across the country and it registered a negative gross refining margin in the first nine months of 2014-15. In comparison, BPCL has a refining capacity of 22 million tonnes at its two refineries plus another nine million tonnes in two JVs and a little over 12,000 retail outlets. It has a gross refining margin of $2.08/barrel. HPCL owns two refineries that process a total of 15 million tonnes of crude oil per annum apart from a JV with 9 million tonnes capacity, and about 13,000 pumps all over the country. The company had a gross refining margin of $1.04/bbl in the first nine months of 2014-15.

These are a comparison of just the main parameters; a detailed study would show many more differences. So, how then can they sell petrol and diesel at identical prices? If this is not collusive behaviour, what is?

The government’s happy

The government appears comfortable with the arrangement though because it suits its own interests. Look at the way excise duties were raised on three occasions in November and December when oil prices crashed to their lowest in recent times. The government appropriated for itself the gains that would have otherwise been passed on to consumers.

Yet, this doesn’t mean the government should not allow competitive forces to blossom in fuel retailing. Reliance Industries, Essar Oil and Shell had announced grand plans for fuel retailing and they even opened a couple of thousand outlets together about a decade ago. But they closed down almost all of them, unable to compete with the PSUs which sold fuel at subsidised prices. The picture is different now. Subsidies, at least in transportation fuels, have been withdrawn and retail prices are linked to the market. Importantly, oil prices, despite the run-up in the last few weeks, are still low. This is the best time to complete the unfinished reforms in the downstream petroleum industry, which is setting the PSU majors — IOC, BPCL and HPCL — free of government control and encouraging them to compete with each other and with the private players.

In other words, deregulation has to be introduced in the true sense of the term. The government needs to play an active part in fostering competition because the three PSUs dominate the market vis-à-vis the private players. With some of these companies lined up for possible divestment of government stake, any move to reform them will only add to their market value.

In the developed countries, retail prices vary from company to company and pump to pump based on location, costs, demand and other such factors. It is not unusual to see prices vary between fuel pumps in the same locality belonging to different companies. That is the kind of competition we need to see in India.

comment COMMENT NOW