Primer. What fuels petrol, diesel pricing

The rout of crude oil since June 2014 has seen the cost of the Indian crude oil basket plummet nearly 60 per cent — from nearly $110 then to $45 a barrel now. Petrol and diesel prices have fallen too, but to a far lesser extent. Across major metros, petrol price is down just 10-15 per cent since June 2014 while diesel has declined 5-9 per cent. In Delhi, for instance, at HPCL’s pumps, petrol now costs ₹66.3 a litre compared with ₹73.6 in July 2014 while diesel sells at ₹54.6, not much different from the ₹57.8 in July 2014.

Three factors explain the wide gap between the price decline in crude oil and that in petro products — the pricing mechanism, exchange rates and taxes.

It’s not actual costs on crude oil sourcing, refining and marketing that determine the price of petrol and diesel in the country. 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. Essentially, the TPP is determined based on prices for these products prevailing in the international market.

Now, while India imports more than three-fourth of its crude oil requirement, it is self-sufficient in refining. In fact, with surplus capacity, the country is a net exporter of several petro-products including petrol and diesel. Yet, the pricing assumes that 80 per cent of petrol and diesel are imported — 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 of these products considers free-on-board price.

Next, the dollar-rupee dynamics also play a big part since the TPP is quoted in US dollar. The rupee has weakened from about 60 to a dollar in June 2014 to about 68 now — this depreciation of about 13 per cent has eaten significantly into the benefit from lower international crude and petro product prices over the past two years. .

The price build-up details of petrol and diesel are published on a fortnightly basis by the oil companies.

For the fortnight beginning December 1, the cost and freight price of BS-III equivalent petrol was $57.46 a barrel. At the average exchange rate of ₹68.23 a dollar, this translates into about ₹3,900 a barrel. A barrel is about 159 litres. So, that’s ₹24.66 a litre. But the Refinery Transfer Price (RTP), based on landed cost of BS-IV petrol, increases to ₹25.28 a litre. The RTP is the price paid by the oil marketing companies to the refineries at the refinery gate. Now, add to this the cost of inland freight, marketing costs and margins charged by the oil marketing companies, and the price charged to dealers (excluding taxes) increases to ₹28.15 a litre. To this, the dealer adds his commission of ₹2.56 a litre. So, that’s about ₹30.7 a litre.

From ₹30.7 at the dealer’s end, the price more than doubles to ₹66.29 a litre at the retail end. This is thanks to both the Central and state governments milking petrol.

Excise duty charged by the Centre is ₹21.48 a litre, while value-added tax in Delhi at 27 per cent comes to ₹14.09 a litre. Together, these taxes account for more than half — about 54 per cent — of the retail selling price at Delhi. For diesel, the price build-up is on similar lines as petrol with taxes accounting for 46.5 per cent of the retail selling price of ₹54.65 in Delhi.

High taxes are a country-wide phenomenon, with just a few exceptions.

The rates vary across States. Madhya Pradesh charges the highest VAT – 40.29 per cent on petrol and 31.51 per cent on diesel. Andaman & Nicobar Islands and Lakshadweep charge nil VAT. Also, States such as Goa and Puducherry levy lower VAT than the rest of the country.

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