The new rules of the game in oil marketing

As the government made major changes in the pricing of oil products last week, there were major apprehensions that the move will fuel  inflation. The concern is genuine as experts were of the view that oil price rise will contribute at least 100 basis points (1 per cent) increase to the already high rate of inflation. Prices will go up directly due to increase in prices of petrol, diesel, kerosene and cooking gas and indirectly due to rise in transportation cost of all commodities.

Naturally, your monthly expense budget will shoot up. Another concern is that despite the increase in prices, the under-recovery (the gap between actual cost and selling price of fuel) will continue to remain high at Rs 53,000 crore for the oil marketing companies (OMCs).  However, amidst the gloom there is a silver lining.

Dynamic pricing

With the removal of all regulatory price control on auto fuels — petrol was completely decontrolled and so will be diesel soon, there are strong possibilities that oil companies will come up with many innovative marketing strategies that in the long run will benefit consumers. Let us look at some of the future possibilities.  Don’t be surprised if you see price of petrol and diesel changing everyday or even within 24 hours in future. Thanks to free pricing, OMCs are now free to decide their own price at the outlets (petrol bunks) and, be sure, to win customers they will offer discounts on the normal price, depending on the location of the pump, the time of the day and stock position. In developed countries it is quite common to see a petrol outlet offering discount of a few cents in off-peak hours.

The spread of internet and the deep penetration of mobiles in the urban areas will make communication easier as all it will need is an email or SMS to inform customers about a scheme. The model of dynamic pricing has been successfully tried by airlines in selling air tickets and now mobile operators are inclined to do so.

Bulk discounts

In future we will also see OMCs offering discounts, may be 3 to 5 per cent, on ruling prices to consumers who buy in bulk. A large transport company operating hundreds of buses or trucks, for example, will be able to strike a deal with an OMC to get diesel at a discount in all their outlets. Similarly, a large company offering fuel coupons to hundreds of its employees can bargain with OMCs for discounted price when an employee buys a minimum amount of fuel. This is already happening in decontrolled products like fuel oil for generators, naphtha, furnace oil, aviation turbine fuel etc. We will also see OMCs aggressively selling different types of branded fuels - where additives will be added to make them more efficient and charge a premium.

Reward for loyalty

Loyal customers who keep filling their cars from the same OMC will be rewarded. In fact, two large OMCs did start reward programmes for loyal customers in 2001 and 2002 when fuel prices were partially decontrolled. After accumulating points on the reward cards, a customer could exchange them for free fuel. Another scheme that may see aggressive selling is ‘Petro Card’ which will allow people to pre-load their card with cash and get small discounts every time they buy fuel.

Even the co-branded credit cards may re-emerge as a major marketing tool. Petrol pumps will also offer free value added services like wiping the windshield, dusting of the car, quick filling system, emission check and quick air filling. Thus, the name of the game will be creating a bond with customers for a long term relationship. With the freeing of oil prices now there will be tremendous pressure on oil companies to cut cost at every stage. Be it refining, transportation, distribution or selling at the outlet, at every stage they will have to be much more operationally efficient.

Eye on efficiency

Since the subsidy on fuel under the earlier system was based on cost of production at refineries and selling, it led to inefficiency at various stages. In future we may often see the marketing arm of an OMC buying fuel from a refinery of another OMC if the refinery gate price and cost of transportation workout cheaper. Surely, in the free market regime the public sector oil companies like Bharat Petroleum, Indian Oil Corporation, Hindustan Petroleum Corporation, etc, will now have to focus closely on operational efficiency to remain competitive.

Reprieve for private firms

The biggest beneficiary of free pricing of diesel and petrol, perhaps, will be the private players like Reliance, Essar etc. In the controlled regime the government-owned companies were partially protected by subsidies from the government for selling auto fuel at a price lower than the cost.

But the private players, who have also invested thousands of crore in setting up refineries, were left in the lurch. In the absence of any subsidy they were forced to price their products higher than PSU companies only to see empty pumps. Reliance, for example, had 1,400 outlets two year ago. Now it operates only 600. Shell, a foreign company, now operates around 40 outlets and was forced to closedown an equal number due to poor business. Private companies will soon find a level playing ground with their state-owned players once the decontrol of diesel is also through.

Operational efficiency of private operators, thanks to Reliance’s gigantic single-location refinery of 27 million tonnes it is one of the least cost oil product producers in the world, will also push PSU companies squeeze out every paisa out of oil and it is the consumer who will be the ultimate beneficiary. In fact, Essar Oil’s Managing Director and CEO Naresh Nayyar, has already told news agencies that Essar will aggressively go for expansion of its retail outlets. The company plans to increase its total number of outlets to 1,700 by March 2011 from the present 1,340 pumps for petrol and diesel.

Biggest worry

While there is no doubt that the free market forces will ultimately benefit fuel consumers through competition and cost efficiency, the biggest threat is the rising oil prices in the international market. After reaching a peak of $140 a barrel two years ago, oil prices in the global market is now at around $75.  Whenever, the prices shoot up buyers in India will now have to pay for it as there will be no subsidy to shield them. Though the Centre has said that it will intervene with a pricing mechanism if the global oil price goes too high, right now there is no clarity on the issue.