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Why have fuel prices not changed in 21 months?

An obvious, though inconvenient, question is, why have OMCs not revised prices to reflect the market?
Last Updated : 14 February 2024, 00:00 IST
Last Updated : 14 February 2024, 00:00 IST

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Petrol and diesel prices in Delhi have remained unchanged for 21 months at Rs 96.72 and Rs 89.62 per litre, respectively. During these months, Brent crude oil price has moved between $75 per barrel and $123 per barrel. Petroleum Minister Hardeep S Puri has repeatedly stated that the public sector oil marketing companies (OMCs) have full freedom to change product prices every day to reflect the world market. An obvious, though inconvenient, question is, why have OMCs not revised prices to reflect the market? 

In June 2017, the so-called dynamic pricing mechanism was implemented by the public sector OMCs to reflect the daily fluctuations in the world market. Prices at the pump should drop when world oil prices drop, and they should rise when the world oil prices rise. But this practice was stopped for 137 days from November 2021 when five states, including Gujarat, were going for elections. It is a mystery as to why the public sector OMCs dropped the dynamic pricing policy if, as the minister says, they are free to follow market prices. It is an even a bigger mystery why the private oil companies failed to take market share when profit margins were high by cutting prices. 

Equally mysterious, and even problematic, from the point of view of the customer is, why do the three public sector companies have the same prices at the pump when their input costs are different? They are expected to compete, not collude, as is expected of private companies. 

In the above background of OMCs holding prices for a long period when the market was fluctuating, Finance Minister Nirmala Sitharaman “halving” their budget is justified. Surprisingly, this news caught the attention of the media, but not the reason behind it. 

In last year’s budget, the Finance Minister had provided Rs 35,000 crore for OMCs -- Rs 30,000 crore for energy transition to net-zero to invest in green projects, and Rs 5,000 crore to buy strategic oil reserves (SOR) to fill caverns at Mangaluru and Vishakhapatnam. 

The FM is on strong ground on deferring the amount for SOR. With the world oil demand having more or less peaked and oil reserves likely to be stranded, the need for oil security is less urgent. In fact, it can be argued that India should seriously revisit the oil security issue in the light of the new oil scenario when the world has to deal with climate change. This may be an unexpected benefit of the FM cutting the budget allocation. 

As for the Rs 30,000 crore for energy transition, there should have been questions raised: For instance, why should the government support profit-making oil companies in the first place? 

If a company is not making money and is incurring losses because of government policy, then budgetary support for green projects may be justified. But in the case of the OMCs, which are expected to earn profits and which are indeed making profits, it cannot be justified. One can give subsidies to encourage companies to invest in specific green projects when required, but
not by infusing capital through budgetary support. 

When the Ukraine war started in 2022 and oil prices increased, oil companies started to lose money for a few months as they held petrol and diesel prices unchanged for months in the election season and after. As a result, against the combined ‘Profit Before Tax’ of Rs 28,300 crore in the first half of FY2021-22, the three OMCs lost Rs 27,200 crore in the first half of FY2022-23. 

In the past, when oil companies lost money as a result of selling products below prices, the government reimbursed the losses. Payment for such under-recoveries was considered
as subsidy. Now, a non-transparent method of budgetary support seems to have been developed. This is not a healthy development. 

Let us now look at the dynamics of petrol and diesel prices. The government had reduced the central excise duty twice -- on November 4, 2021, and May 22, 2022, effecting a cumulative reduction of Rs 13 and Rs 16 per litre for petrol and diesel, respectively, supposedly to control inflation and help consumers.

While the excise duty cuts of May 2022 can be supported because of oil prices averaging $113/b in May (they had reached even higher at $117/b in March), it was not the case in November 2021 when the average oil price was considerably lower at $81/b. 

Since May 2022, after the second excise duty cuts, the OMCs have frozen prices for 21 months. Despite supposedly having the freedom to follow market prices, why did OMCs not change prices when world market prices increased after the start of the Ukraine war? As discussed above, they lost a huge amount of money due to this. 

However, when oil prices started to come down later, in the second half of 2022 and also in 2023 (Brent prices moved in a band of $80/b to $90/b, excepting for one month in 2023), the OMCs kept the prices unchanged to earn profits to compensate for the losses incurred earlier. They earned a sizeable profit of Rs 516 crore in the first half of 2023. 

It is because of the improved profits of OMCs that the Finance Minister
may have decided to halve the budgetary support. 

Unlike public sector oil companies, private companies cannot afford to lose money. In fact, private oil companies diverted products to export market and the government had to impose export restrictions. There should be an investigation into the reasons for keeping the oil price unchanged for such a long time. 

Despite the diversion of crude oil ships from the Red Sea because of Houthis bombing transit ships, world oil prices have remained soft. They are currently below $70/b, and most oil pundits are predicting an even softer oil market. 

There is increasing speculation that OMCs may, after having held prices all these months, reduce petrol and diesel prices again. After all, another election is coming, this time the big one, the Lok Sabha election! How should we interpret it if a price drop occurs now – as the oil marketing companies exercising freedom to track world prices or as doing what the government, which claims not to interfere, wants it to do?

(The writer is a former global oil industry executive)

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Published 14 February 2024, 00:00 IST

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