Petrol: Govt goes for consumers' jugular

Petrol: Govt goes for consumers' jugular

The UPA government has made a mockery of its June 2010 decision of decontrolling petrol pricing. As a prudent economic and fiscal policy measure, that decision cannot be faulted.

DH GraphicsIt was a right step, particularly since the cost of importing crude oil was widely fluctuating in the international market. Under the hitherto Administered Price Mechanism (APM) of determining retail price of petrol, the government determined the price and this was not flexible enough to make regular price corrections that reflected the widely varying cost of imports.

Further, the country’s dependence on crude imports, which at present stands at around 80 per cent of the total domestic consumption, has kept rising sharply in recent years. The government’s inability to introduce regular price corrections meant that it had to absorb huge losses by way of subsidies given to the government-owned Oil Marketing Companies (OMCs), which continue to play a dominant role in retail marketing.

So, the new decontrolled regime for determining the retail price of petrol required OMCs to revise on their own – without the requirement of the government approval - the retail price at the beginning of each fortnight on the basis of the average cost of crude imports in the preceding fortnight.

The OMCs would be required to fully recover any additional cost in crude imports by way of upward revision of the retail price, or pass on the benefit to the consumers in the event of a reduction in the cost of imports. However, the OMCs have failed to make fortnightly corrections for five months – the last fortnightly revision by way of a reduction was in mid-December, 2011.

And, the last fortnightly upward revision was on November 4, 2011, over six months ago. Didn’t the fortnightly trends in import cost of crude warrant the revisions? Interestingly, the applicable average cost of crude imports stood at US$108.59 per barrel at the prevailing average exchange rate of Rs 49.36 per dollar (October 16-31, 2011). In rupee terms, the real cost of imports was Rs 5,211.99 per barrel.

Consider the latest applicable average cost of import, which is the May 1-15 fortnight, and which should have been the basis for price revision. The relevant figures are: US$111.15 per barrel at the average exchange rate of Rs 53.41 a dollar. Or, Rs 5,957.89 a barrel. It needs to be emphasised that the additional cost of imports - between the two fortnights separated by six months - in rupee terms is just about Rs 700.

Though the rupee has depreciated significantly, the fact is that the crude prices are comparable. The question is whether the additional import cost of Rs 700 warranted a basic upward retail price revision of Rs 6.28 per litre announced by the OMCs last Wednesday. The OMCs estimate that they lose by way of under-recoveries Rs 8,000 crore a year when rupee depreciates Re 1 against the dollar. But the point is that not all the cost of crude import is be to imposed on petrol users as petrol as a refined product constitutes only 47 per cent of one barrel of crude.

IOC Chairman R S Butola revealed on Saturday that the OMCs had lost Rs 2,400 by way of under-recoveries in petrol sale over the last 50 days, since the beginning of the present fiscal. That works out to approximately Rs 50 crore a day, or around Rs 18,000 crore a year. However, the OMCs stand to mop up much more than Rs 50 crore a day from the basis price revision of Rs 6.28 per litre. By their own estimates, the OMCs stand to collect around Rs 50,000 crore a year from the sharpest-ever increase in the retail price of petrol.

Allowing that around 40 per cent of this collection goes to the government by way of customs and excise duties imposed on the fuel, the OMCs will mobilise much more than Rs 18,000 crore from the hike - much more than also to cover up for the under-recoveries of Rs 4,890 crore in petrol sales in the last fiscal, as stated by Butola.

Petroleum Minister S Jaipal Reddy was on thin ground when he tried to justify the unjustifiable. The fact is that OMCs should have effected a peak rate of hike in mid-March when the imported crude cost was the highest in over a year and the rupee too had depreciated to over Rs 50 a dollar. Since then, however, the retail price of petrol should have softened, notwithstanding the latest round of rupee depreciation. The reason being that the crude price has eased in dollar terms.

This leads to a suspicion that the OMCs may be partially making up for their huge losses by way of ballooning under-recoveries on account of diesel, kerosene and domestic LPG sales in the retail market. These three products are still under APM regime. The UPA government remains reluctant to hike retail price of these products for political reasons as well as fears about fueling inflation that has been high for nearly three years now.

What is also not to be missed is that the UPA government too benefits from the huge hike in petrol price. The first few weeks of this fiscal have seen a worrisome decline in revenue collections for a government which is unwilling to effect spending cuts.  The additional revenue collection from increased petrol price alone will be very significant as over 55 per cent of retail petrol price is in the form of taxes – a lion’s share of which goes to the Central kitty. The hike, thus, amounts to a windfall for both the government and the OMCs.

In the case of the government, it is not just the additional revenue that it stands to mop up. The UPA government is also guilty of pressuring the OMCs against discharging their responsibility to revise retail petrol price every fortnight just to suit its political convenience. There is no other explanation for the OMCs failure to revise price upwardly when the cost of imports was at its peak in mid-March.

The fact is that the ruling Congress and its allies/friends were preparing to fight important Assembly elections from January this year. High petrol price did not suit them then. Unchanged fuel price is like a political subsidy they extracted to fight the elections.
The losers are the petrol consumers, who end up paying for the government’s electoral battles on the ground, and political battles by way of mega public spending schemes.

It is unfair to use petrol pricing to partially cover up for subsidised sale of other fuels like diesel and kerosene. Petrol consumers cannot be asked to share the burden of the OMCs and the government on account of losses incurred on account of diesel and PDS kerosene, though that precisely seemed to be the logic behind the highest-ever hike in petrol price.

Crude price and exchange rate 

Fortnight    USD/barrel    rs/ USD

* Nov. 1-15    110.51    49.65
* Nov. 16-30    108.8    51.82
* Dec. 1-15    108.22    52.35
* Dec. 16-31    105.95    52.96
* Jan. 1-15    110.95    52.52
* Jan. 16-31    110.04    50.28
* Feb. 1-15    114.61    49.19
* Feb. 16-29    120.99    49.12
* Mar. 1-15    124.03    49.88
* Mar. 16-31    123.19    51.21
* Apr. 1-15    120.58    51.21
* Apr. 16-30    116.2    52.18
* May. 1-15    111.55    54.68

Source : Petroleum Ministry


CRUDE OIL: Breakup of refined products

*A standard barrel of crude oil is equivalent to 158.86 lts
*One standard barrel of crude actually results in 66.43 lts of petroleum products after the refining process
*The share of different refined products from a barrel of crude are as under:

    a. Petrol     74.34 lts (47%)
    b. Diesel    37.96 lts (24%)
    c. Jet fuel    15.40 lts (10%)
    d. Residual oil    06.51 lts (04%)
    e. Other petroleum products like kerosene, still gas, liquefied refinery gas, various lubricants,wax, asphalt etc.     24.72 lts (15%)

Source: www.r3sciences.com

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