Has surging crude oil brought politics back to energy pricing?
Fuel prices in India have remained range-bound in the past six months although crude oil has surged, indicating that state-run retailers are mindful of the political impact of rising fuel prices, although they have the freedom to revise rates daily, in line with changes in crude prices.
Petrol prices in Delhi rose by about 6% between 1 June 2017 and 14 January 2018 to Rs71.06 a litre, while the price of India’s basket of crude shot up by over 63% during the same period. Crude, which averaged $46.56 a barrel in June 2017, rose to $76.08 on Sunday. The rupee, which appreciated against the dollar during the period, helped state-run fuel retailers keep price increases to a minimum.
Retail prices of petrol and diesel in India are linked to the price of these fuels in global markets, not that of crude oil per se. That gives the demand-supply situation of finished products in global markets some effect in the retail price of auto fuel here. Despite that, crude oil, which accounts for about 90% of the cost of these refinery products, is the biggest determinant of the retail price of fuel.
State-run fuel retailers Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd switched to daily price revision from a fortnightly pricing system in June as the government sought to further the pricing reforms in the sector when prices remained subdued. Crude oil fetched $46.96 a barrel then. Company officials said that retail prices are not being raised to the extent international prices warrant.
“If there is a spike of $1 in crude oil price in a week, we can’t pass it on completely. Every day, fuel prices are going up only by 6 to 8 paise. Passing on the entire price increase in global market to consumers may take time as we are doing it in small doses,” a senior official at a state-run fuel retailer said on condition of anonymity.
Under dynamic pricing, fuel prices are revised at 6am daily at petrol pumps.
“The free-market pricing isn’t playing out as we expected,” Ritesh Gupta, an analyst at Ambit Capital, said in a report dated 4 January. Gupta added that at current crude prices, all else remaining the same, state-owned retailers will need to take a price hike of Rs1.50 per litre on diesel and petrol to normalize their margins.
Marketing margin on auto fuels for the third quarter was at Rs0.27 per litre, the lowest since diesel deregulation in mid-October 2014, various analysts’ reports said.
Another official at a fuel retailer said that the company also takes into account the convenience of customers.
“If there is scope for protecting consumer interest, we certainly do the needful. Any reduction in margins when global prices are high can be made up for when prices are down,” said a second official from an oil marketing company, who also asked not to be named.
Brent price in the quarter ended 31 December was $61.4 a barrel, a 23% increase from $50.1 in the year earlier and 19% from $51.7 a barrel in the previous quarter. Between April and November 2017, India’s demand for petroleum products grew 4% from the year-ago period.
“After the Gujarat elections, we have taken a calibrated increase of Rs1.4 a litre on diesel and Rs0.9 per litre in petrol prices in December 2017. We think with a busy election season on the horizon, we may not be able to take as many fuel price increases as we would like. We do not see tax cuts coming in either,” said a third official from an oil marketing company, who also spoke on condition of anonymity.
Emails sent to state-run oil marketing firms on Sunday remained unanswered at the time of going to press.
To set prices of petrol and diesel, Indian oil companies consider trade parity pricing, which is determined based on prevailing prices of these products in the international market. The pricing formula involves 80% of import price and 20% export price of the fuel. To the trade parity price, other elements like dealer commission, excise duty and value added tax are added.
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