Sharp Surge In Petrol Price In India : How It Is Decided

Petrol Price at Glance:

Petrol Price, as we know always a hot topic. During UPA Government, the opposition used to curse Manmohan Singh for Petrol Price Hike. Slight change of Rs. 50 Paisa to Rs. 1 would lead to nationwide protests. Opposition leaders used to sit on dharna and even stall the proceedings of Parliament. But now there is is a hike of about 26% since June, But even media is keeping mum. Global Crude oil prices are half of what is in 2013-14.  The rupee has been mostly stable against the dollar. But the prices of petrol/diesel, which is now based on Dynamic Fuel pricing, continue to be running uphill in last 3 years.

Anyways, This article is not about criticizing the failed policies of any government. It is to explain how petrol price is decided. what are the factors that play important role in settling price of petrol/diesel?

Factors That Play With the Petrol Price

Petrol or other fuel Price may go up due to following factors:

1. Increase in Crude Oil Price in the International Market:

This is the most important factor responsible for the pricing of fuel. Right now, the price of the crude oil is ₹ 49.85 dollars/Barrel (as on September 15, 2017). It was almost 135 Dollars/barrel in 2013. So more the price of crude oil, more will be the domestic price of fuel.

On March 1, 2014, two months before current NDA government came to power, Crude oil and petrol price was $ 108/barrel and ₹. 73 respectively.

On September 15, 2017, Brent Crude oil and petrol price is $ 50/barrel and ₹ 79.85 respectively.

2. INR Fluctuation Against the Dollar:

Because we buy crude oil in terms of Dollars. When Indian currency fluctuates and devaluates against the dollar, Price of crude oil automatically rises for us.

Though the ERI (exchange rate impact) has been mostly inactive during recent time. The ₹ was trading at ₹ 61.65 against the dollar on March 2014. It was 63.90 on September 12, 2017.

3. High Consumption Leads to Price Hike:

Oil prices also work on demand and supply concept. If consumption is high, the supply will go low and prices will thrive. More the demand for Crude oil more will be the elevation of Dollar against other currencies. And ultimately price will rise.

4. The Increase in Profit Margins for OMC:

OMC stands for OIL marketing companies such as Bharat Petroleum Corp Ltd, Hindustan Petroleum Corp Ltd. etc. Let’s start with an example of Indian Oil.

  • On 17 Jun 2017, Indian Oil Corporation paid ₹ 24.89 to oil refineries and sold it to traders at ₹ 27.33 with 9.8% profit.
  • Then 12 September 2017, It paid ₹ 26.65 per liter to oil refineries & sold it retailers at ₹ 31 per liter increasing the profit of 15.79%.
  • So the net profit of IOC increased from ₹ 2.45 to ₹ 4 and the ultimate burden is on consumers.
  • Oil refineries are now getting ₹ 1.76 increments per liter of Petrol. For example, Reliance oil refinery now concealing ₹ 15 crore per day due to price hike in their commission since June 2017.
  • Simultaneously with OMCs & oil Refineries, Petrol pump dealers who got up to 49% up increment in dealers profit till August 1, 2017.
  • So petrol pumps are making the commission of ₹ 3.30, rather than ₹ 2.55 per liter after “dynamic pricing” was introduced by Indian Government.
  • Data here suggest there is no change in State or central taxes on fuel after the “Dynamic Fuel pricing” policy was implemented.
Petrol price
Petrol Price Calculations till August 24, 2017
  • And this is the graph showing a hike in taxes by the center on Petrol. Excise duty is static since 2016.

Central Taxes hike on Fuel per liter

  • So data clearly indicates that the primary beneficiaries of “Petrol Price” hike since the “Dynamic Fuel pricing” is proposed, are OMCs, Refineries & Petrol Pump retailers.

********Though center and state also hiking their taxes on fuel and not passing the low crude oil price to consumers, the example given here is increasing after dynamic pricing was introduced*********

Break up for price of Fuel ( Petrol & Diesel)

International Price of Crude Oil is charged on the basis of barrels. Currently, it is 49 dollars per barrel. And one barrel is equivalent to 159 liters of crude oil. As till September 15, one dollar nearly equals to ₹ 64. So, in terms of ₹, it is ₹ 19.31 per liter (approx.).

Central taxes increase on petrol price

OMC Cost calculation:

  • Entry tax + processing cost + operating cost = ₹ 3.3 per liter
  • OMC Margin + All carriage cost = ₹ 2.5 per liter
  • Excise duty (Central Govt.) = ₹ 21.5/Liter (as on 16th August 2016)
  • Petrol Pump Commission = ₹ 3.30/Liter
  • State tax (VAT which varies from state to state) = . 14.40/Liter (petrol)
  • ₹ .25 as pollution cess.

How cruel it is that we are paying more taxes than the actual cost. Fuel price hike is something which is responsible for the price of everything (transportation) going up. Central govt is hiking excise duty, and state govt’s are increasing VAT. I don’t know, how will they handle the situation if crude oil price rocket up again to pre 2014 time.

Petrol Price vs. Crude Price
(Source: Indian Express)

There is a funny thing about Dynamic Fuel pricing introduced by the government. One of the Minister said that it will ultimately help the consumers because, with a decrease in international price, the price of petrol will automatically come down. But since its implementation, Petrol price is increasing day by day, does not matter if the crude oil price is going up or down.

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