petrol and diesel prices deregulated in india | ajithprasad

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Petrol and Diesel prices deregulated in India

26 Jun

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Petrol and Diesel prices deregulated in India | ajithprasad.com http://ajithprasad.com/petrol-diesel-prices-deregulated-india/

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Yesterday, the Government of India has taken a bold decision to deregulate petrol and diesel(partially) prices in India and also come up with a price hike.

As usual the vote bank politicians on the UPA

alliance, opposition leaders and the left have voiced their protest. They claim that they are with the

people of India and whole lot of other crap. Two of the most politically spoiled states in India The

West Bengal and Kerala have readily jumped on to celebrate the situation with a Hartal (strike).But do they even know how pampered the people of India already are how much they are misusing

one of the most limited natural resources such as petrol (LPG and diesel as well)?

What does deregulation means?

Decontrolling or deregulating the petrol prices mean that, the government will no longer be

subsidizing petrol prices and the prices will be purely linked to the international crude prices. In

the case of diesel, though, it will be only partially regulated the reason being an attempt to avoid

sudden spike in inflation.

Why should Petrol cost more?

As all of us know, petrol (or Gasoline) is produced out of crude oil which is a natural resource thats

available in limited quantity. It is a matter of a few years before the crude gets totally exhausted.

Although, there have been several crude discoveries in India, we are still dependent on the OPEC

(Oil Producing and Exporting Countries) to import crude and refine it to produce petrol, LPG,

diesel, aviation fuel, kerosene etc.

Petrol production cost

As of today (26 June 2010), the crude oil costs $79 a barrel (159 Litres). Since this has to betransported to India via the marine root, there is a shipping cost. Lets say its something like 10%.

Since the import duty on crude oil was waived sometime back, let us not count that part. Hence by

the time the crude arrives in India, it is already costing something like $85 per 159L.

So the petrol refining calculation goes as follows:

Cost of 1 barrel crude: $85 or Rs. 3910.00 (exchange rate of 46)Quantity of petrol produced from 1 barrel crude: 72L (45.4%)

Since almost 100% of the crude is refined into some product or other, we can calculate the rawmaterial cost of producing 72L or petrol as 45.4% of the price of crude barrel.


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Hence 72L petrols material cost alone is 3910 * 45.4 / 100 = Rs. 1775.00

Raw material cost of 1L of Petrol = 1775.00 / 72 = ~25 rupees

Obviously, the raw materials alone do not contribute to a product. You need electric power,

thousands of paid employees, machinery, maintenance etc to finally produce petrol. So finally when

its of consumable form, it is costing around 30 rupees in the oil refining spot itself.

Taxes, marketing and distribution cost

The following are the other additional expense before you can consume the petrol at your favorite

gas station:

Excise duty

Education tax

VAT

Distribution and transportation cost

Dealer commission

As I understand, all the above added up comes to around 27 rupees per litre of petrol the majority of

the cost is towards excise duty, transportation cost and VAT (Isnt it a pity you have to spend more

petrol or diesel to distribute petrol?)

Essentially, one litre of petrol, by the time it reaches the petrol filling stations, is costing you already

Rs. 57/- without any profit added to the petroleum marketing companies. Obviously most of these

companies are state run companies and hence cannot afford to reap 100% profit. Lets turn our back

on them and tell them that you can make say 20% profit. And if you add that your 1L ofpetrolshould actually cost you around Rs. 68/-

Now, arent you really lucky that its available below Rs.60/- even with the latest hike in petrolprices?

Subsidy woes

The story is not over yet. One needs to do similar calculations for other products such as diesel,

aviation fuel, kerosene and LPG. Unfortunately diesel is the primary thing that fuel public transport

and distribution system in India and kerosene LPG are house hold lifesavers when it comes to

cooking purposes. In order to curb the inflation and protect the below poverty line people, the

government has to subsidize it big time. A part of this subsidy cost is absorbed by the governmentwhile the oil marketing companies bear the other half. This puts some pressure on the government

to increase taxes on luxury consumption sectors such as airlines by increasing aviation or jet fuel

prices. They are also taxed heavily which is mainly borne by the rich or upper middle class people

in India.

Why deregulation of petrol prices is good?

The deregulation of petrol prices will definitely increase the rate of inflation in short term. Virtually

there will be immediate price rise in commodities and other consumables. However, for long term

I think it is a good move because at the end it will definitely reduce our long term debt and fiscaldeficit. Our overall economy will get stabler in this case.


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Secondly, this measure will be a boost to the oil producing and marketing companies to recovertheir losses immediately. Remember, lakhs of people work in these huge companies and they need a

life too. Moreover, the government run oil companies will be candidates for disinvestment whichmeans that the government can lower their fiscal deficits further with additional income.

The other advantage is that the inflation, at the moment, is a fake figure. You will get to know the

actual inflation and variation of commodity prices only when the petrol prices move according tothe international crude prices.

This will also bring in big private players (e.g. Reliance) into the petrol marketing game.Remember that companies like Shell and Reliance used to provide excellent quality of petrol and

service until Reliance pumps were forced to close down due to government regulations. This kind of

competition will eventually bring in good service, good quality and in the future competitive

pricing as well. The immediate woes will be compensated in the mid term thats my strong belief.

The government, in the meantime, should try to reduce the excise duties and restructure the VAT to

minimize the impact of immediate fuel price rise on inflation and the poor people.

Long term solutions to curb petrol prices

In the long term, there are several viable solutions that needs to be done from the sourcing point to

distribution and consumption.

There are possibilities ofunder sea pipes (just like the one we were planning with Iran for gassourcing) from the vendor nation to India to reduce shipping cost. This has a very good long term

positive impact though initial cost of incorporation is high.

The oil refining companies sourcing and storing mechanism needs to be optimized in a way thatwhen the crude prices are low, we are able to store more. I am not sure, how much of optimization is

done in this regard. Since we keep getting new and new governments every few years, they may not

go for a long term plan for the same. Please remember that not too long back, the crude prices were

at $35 or so per barrel.

There is a scope for improving the internal distribution system as well. Though, India has a huge

geographical region, we can still have oil distribution pipes from refineries directly to the regional

distribution centers. This needs long term planning.

Final thoughts

I think our citizens (and even people from rest of the world) are misusing petroleum products and

this kind of abuse needs to be first controlled via price hikes and then by introducing alternateenergy options and technologies to optimize the usage. There is a lot of scope for India to take outthose old, fuel inefficient vehicles from our roads. I think the taxation needs to be restructured

so that people and families who own more than one vehicle should be taxed more. There can be

several other long term steps to improve the overall situation but please remember that at the end of

it the petrol will anyhow get exhausted.

And a request to our great politicians who always oppose what the government is trying to

implement. If you are really with the people of India, please come up with real practical

suggestions to improve the situation. It wouldnt be too long before you will be stone-pelt by the


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younger generation for preventing them an opportunity to live in a developed country by 2020.

And my questions to my friends (not the poor) who are earning in thousands and lakhs. How dareyou crib about a three rupees rise in petrol while you still prefer to drive to office alone in a 5,

10 or 15 lakh car?. More over I havent seen you cribbing while spending 1000 rupees for a dinneror while buying a shirt worth 1500 rupees.

Think long term friends!

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Comments 33 Comments

Categories Politics

Author Ajith

33 Responses to Petrol and Diesel prices deregulated in India

Jagadish K 30. Jun, 2010 at 8:50 am #

Hi Ajith,

This blog is really a very informative about deregualtion in fuel prices in India.

keep posting such article,

Thank You,

Jagadish K

Reply

Ajith 30. Jun, 2010 at 11:39 am #

@Jagadish, thank you very much for your compliments. As you know, the IT people

have relatively less time for activities like blogging. But I keep it a point to blog aboutthings I like, as time permits.

Thank you for your readership.

Reply

1.

Saurabh 30. Jun, 2010 at 10:44 pm #

Nice post. I am just curious about how they would be deciding the petrol price? If petrol priceis purely based on market, then how many times would it fluctuate in a day/ or in a week?

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Any idea?

Reply

Ajith 30. Jun, 2010 at 11:40 pm #

@Saurabh, thank you for your comment.

Its a good question. In my opinion, Indian oil marketers shouldnt change the crude

linked petrol prices the way they do it in the US (where it can even change three or four

times a day). Indian companies should adopt a common strategy of revising it every

fortnight or so. Anyhow, there will not be huge fluctuation in prices everyday unless

theres a disastrous news breaks or something like that. Also, predictions like the one

by Forecasts.org crude forecast can be taken as an indicator for the frequency of

change.

Reply

Neha Jassal 01. Jul, 2010 at 5:08 pm #

Good information ajith

Thanks.

Reply

Ajith 01. Jul, 2010 at 11:44 pm #

@Neha, you are welcome.

Reply

3.

Prajwal 03. Jul, 2010 at 6:11 pm #

Very well done Ajith, you covered this topic without leaving any questions behind, was

informative and interesting keep up the good work cheers Prajwal

Reply

Ajith 04. Jul, 2010 at 11:20 am #

Thank you very much Prajwal for your comment.

Reply

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sarika 03. Jul, 2010 at 6:23 pm #

Hi Ajith,

I was trying to figure out the implications of deregualtion on the economy and your article isindeed very useful. Though Im not complaining about the hike in the larger interest economy,

I am certainly concerned about people who do not earn more than a few thousands a month.

How do you think will they cope up with this sudden rise. Do you think there could be some

other way to keep at least prices of essential commodities down, other that lowering the tax

rate as suggested in your article.

Reply

Ajith 04. Jul, 2010 at 11:25 am #

@Sarika, there are two main linked issues related to the fuel price hikes. Immediate

commodity price increase and then transportation (persona & public). In both cases,

theres no immediate fix unless the govt decides to go down on the excise/VAT

structure. However, in the long run I hope to get these things solved as the government

fiscal deficit is coming down big time. You saw recently that the 3G auction brought in

70 thousand crores :) and thats good for the country in the long run.

By the way, I am not an economist nor do I understand macro economic factors very

well Its purely my views based on my limited knowledge but I have the believe that

India 2020 plan is right on course.

Reply

5.

sarika 05. Jul, 2010 at 11:17 am #

Thanks again. I just heard Arun Jaitley defending their stand of calling a bandh, stating that

even when they were in power, deregualtion was proposed, but the global petrol prices were

not as high as they are now. So taking this step now when the global petrol prices are already

sky rocketting, is a hard blow on the common man. Im not an economist either :-), butgenerally interested in such topics, since we are the ones directly affected. Thank you for all

the information provided on this topic.

Regards,

Sarika

Reply

6.

Bikram 20. Jul, 2010 at 7:25 am #7.


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Excellent information provided on Degularisation of Liquid gold in India.

Thanks a lot Ajith.

its a eye opener for naive hypothetical politicians who dnt give a shit for India.

Reply

Gayatri 21. Jul, 2010 at 11:50 am #

Hi.. was going through your blog while trying to get the cost of production for refined

products from crude. Can you please tell me the source from where you got the cost of

production of petrol. Will be very useful! thanks!

Reply

8.

Ajith 21. Jul, 2010 at 1:26 pm #

Thanks Sarika, Bikram and Gayatri for your comments.

@Gayatri,

The following is how they actually calculate the price.

The basic price of petrol component of crude is currently priced Rs. 23 (Which ideally should

be Rs.25/- based on international crude prices as I mentioned). Every other part is calculated

on this basic price.

In union budget 2010, both excise and custom duty on petrol were hiked (Notification:

http://indiabudget.nic.in/ub2010-11/bs/speecha.htm) and this caused petrol excise duty to go

up to Rs.14.35 and custom duty to Rs. 1.73 (7.5% of basic). The govt also proposed to restore

the 5% import duty on crud (This part I am not sure if it was implemented, as I mentioned in

the post)

Hence

Basic price: 23.00 (govt fixed)

Excise duty: 14.35 (earlier it was 13.35)

Edu cess: 0.43 (3% of excise duty)

Custom duty petrol: 1.73 (7.5% of basic)

* Custom duty crude: 1.15 (5% of basic)

VAT: ~7.00 (Varies between 22% and 35% from state to state, assuming 30%. Income for

state govts)

Dealer commission: 1.05 (fixed long back)

Transportation charges: 6-8 rupees per litre (as I read in various forums/news paper archives)

The total is around 56 at the current base price and around 59 at a base price linked to the

current crude price. Add 20% margin as I mentioned in the post and shipping cost :) to get the

actual spend.

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However, as I suggested, by restructuring the state VAT and by reducing excise duty, it is

possible to bring it down to 50 or so. At the same time, one has to think that, we are paying

for a natural resource thats in limited stocks and fully imported. Lowering the price will

increase consumption and subsequently cost/import spending of the government. There has to

be a balancing act, at the end.

Reply

Durgesh 30. Nov, 2010 at 4:54 pm #

Thanks for such useful information. Actually I didnt know about all this but you cleared it to

me. Once again thank you! And I also belong to the IT industry and know how much time we

could use for such things like blogging etc.

Reply

Ajith 03. Jan, 2011 at 2:49 pm #

@Durgesh, thank you for stopping by and commenting. Yes, we could always spend a

little extra time to spread awareness and thoughts on topics that matter, couldnt we? :)

Reply

10.

Nitin Sharma 03. Jan, 2011 at 1:04 am #

A very good artical. But I have only few comments over this

The author says that no profit to OMC while the subsidy was there.

Offcourse OMC were selling at lower cost then production on petrol and diesel, But they are

getting the financial recovery by GOI and Upstream companies (ONGC and OIL).

The under recoveries on petrol and diesel is just 1% of the total revenue GOI is getting from

petroleum products.

Another thing is that, If u see the finalcial statemets of OMC, they were not running on loss as

the final figure. They were making huge profit on other refining streams.

They offcourse have the refining marging on petrol and diesel. Then they have marketingmarging.

I dont understand if say IOCL, which has the refineries and also a marketing company, why

are they keeping marging at two different stages( one at refiney gate and another as marketing

margin) for the same product and from the same company.

And we say about the salary of the workers working in OMC. They get more then the average

salary from most of the other pvt compaies.

I dont agree with the statments by the official like Burdan of recoveries . Come on, its jsut

the 1% of the total tax revenue over the petroleum perducts. Cant GOI bear that, instead of

passing the same to common man.

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At last, I agree that the price deregulation is a good step and the prices should by market

determinent for any commodiy to make a competative market.

But the GOI should look into its tax structure on petroleum product and revise the same.

Reply

Ajith 03. Jan, 2011 at 2:55 pm #

@Nitin, thank you very much for your value adding comment. I really appreciate it.

In my opinion, despite the financial aid from upstream companies and GoI, these

publicly listed oil companies are having a combined debt of 1 lakh crore (BPCL 22

thouand crores, HPCL ~25,000 crore and IOC 45K cores). As a listed company, they

have to clean up the mess and the government has to support that cause. The

Government has to play a balancing act here and I totally agree with you on that by

reducing the cess factor a bit. However, that shouldnt be so entertaining that theconsumption goes up. As I maintained, for a limited supply of natural product such as

petrol, everyone has to pay a price, at the end.

cheers,

Ajith

Reply

CallMeWhatWant 20. Jan, 2011 at 10:43 pm #

Hmm..I would have had respect for your article if not for the last paragraph(how dare

you..blah blah) where you took out all your frustration albeit couched in concern for our long

term debt and fiscal deficit. And man, enough of this holier than thou and doing your bit

crap. We all know why ppl blog :)

All that said, I must give credit to your calc(I trust it to be accurate) although I am sure you

have taken a very simplistic view of the whole thing. While talking about long term govt

measures, you seemed to have missed out stuff like improving the public transport system.

Acknowledged we have something in place but is it good enough for ppl like me who spend

5k on a shirt(that is none of anyones bloody business btw i choose where to spend my

money).And as a tax paying(agreed not by choice thanks to TDS) citizen, I see nothing wrong in

expecting more from my govt. Let not my govt keep talking about their helplessness on the

crude prices front let my govt do some out of the barrel thinking and reduce my burden

on this front i have every right to expect more!!

Reply

Ajith 23. Jan, 2011 at 10:35 pm #

Your Excellency,

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Since you havent provided any name, I should call you that with utmost respect. If the

current system is not good enough for you and you dont even want to pay the taxes

willingly, you dont anyhow deserve to be part of this country. I guess, esteemed people

like you should have been born in the US or somewhere.

And by the way, its my blog and I will write whatever I want. And about this comment

We all know why ppl blog:) It would be great if you can elaborate on that? I blogbecause I want to express my views to the public. Do you have any other definition of

the blog?

Reply

G. Shiva Shankar 24. Mar, 2011 at 10:28 pm #

This is awesome.

I am thankful to you Mr.Ajith

good job.keep it up..

Reply

13.

Manu 26. Apr, 2011 at 10:29 am #

Excellent Article dude..I was trying to calculate the same.Very informative.

Reply

14.

Arun 26. Apr, 2011 at 10:45 am #

Hi Ajith,

So the basic question is whether most Indians are willing to shell out more money to buy the

fuels ?. I will giv you the answer and that is No. I bet you are not surprised. Sadly it has

been a unfortunate characteristic of most of the Indians to focus on shot term goals that can

hav negative impact on our future rather than long term benefits. This is a common trait from

a constable on the streets to cabinet minister. We will not be able to kick out the habit

internally. I think there will be a bleak future when this oil firms will suffer bankruptcy and

will be unable to buy the oil. The govt may hav to dip into its foreign reserves too much for

buyin the oil. And it will find itself in catch 22 situation whether to fund oil subsidies or to

fund food subsidies. I did not arrive at the conclusion by watching armaggedon Hollywood

movies. I arrived at this conclusion by studying our history carefully . Remember the 1990s

when the govt had to surrender its gold bullion to pay of the debt. We only had foreign

reserves to last two weeks. That was the kick in the ass situation. It took this humiliating

incident to our respected ever sleeping politicians to liberalize the economy and push the

country to the path of development. We hv only ourselves to blame for this timid we will

only react when we are cornered attitude. I will pray that this time it will not be too late for

our nation to gain its sense.

15.


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I dont know whether to congratulate or sympathize a man who has come to his senses

somebody famous forgot his name ;-)

Reply

Ameer Mawia 29. Sep, 2011 at 11:21 pm #

Awesome Reading to say in the most terse manner.Very Informative and to the point.And on

the top of that, very pragmatic stand taken on the issue concerned,which I guess, most people

either dare not take or dont have that intellect to comprehend the long term need and goal of

the country.

Reply

16.

Nitin 30. Sep, 2011 at 9:28 pm #

Mr. ajit thanks for the detail study. My one basic question is why we get brent crude which

costs around 105 usd(average) as against 83 usd of Nymex crude. Can any body has the

answer?

Reply

17.

Idris 04. Oct, 2011 at 11:47 am #

Very nice article.

My suggestion is that government should identify alternate source of income and reduce the

excise duty and VAT on petrol(diesel). Because the crude price will keep on going up and

unless Gov take some long term measures,Petrol will be as costly as Gold.

Also, Electric Cars can be a great boon for India (As We dont need very high speeds and the

distance to be traveled is usually under 100 KM/day which electric cars are capable without

recharge.) , Government should promote Auto companies making electric cars and should

give them subsidies.

-Idris

Reply

18.

Vijay 02. Nov, 2011 at 1:24 pm #

Dear Ajith,

Appreciate your effort in analysing this imp issue. However, what I fail to understand is that

why should there be any under recoveries. As we know the cost of petroleum products areheavily taxed which increases the selling price and GOI provides subsidies on the increased

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price (post tax). Cant the GOi reduce taxes on crude and refining products to lower the actual

cost?

Reply

Ajith 08. Nov, 2011 at 3:21 pm #

Vijay,

Thanks for your comments. As I mentioned in my closure remarks, reducing the VAT

and taxes is the short term fix. However, we have not control over the international

parameters right?

For example, at the time of publishing this post, the crude price was $79 and USD-INR

value at 46. Now (Nov 08, 2011), the former is $109 and USD-INR hovering around

50. So the raw material (before its shipped to India) price itself has increased by FLAT

50% percent. i.e. (79 x 46) to (109 x 50) but the retail prices were not completely raised

by that percentage yet. So the government has tried to do something, so are the stategovernments. However, as you rightly said some amount of short term measures can be

done to bring the price down to 60s. Beyond that would be really bad for all (because

the consumption might increase as well)

Its a very funny economic problem to solve whereby the resources are not produced in

India and in the international market itself, the supply is limited :)

Reply

Shailendra 11. Nov, 2011 at 1:29 pm #

In the story above, you mention,

Although, there have been several crude discoveries in India, we are still dependent on the

OPEC (Oil Producing and Exporting Countries) to import crude and refine it to produce

petrol, LPG, diesel, aviation fuel, kerosene etc.

I wonder why can we need to import crude when it is available locally

Reply

20.

Statsvak 31. Jan, 2012 at 11:49 am #

Hello Ajith,

Thanks for the info. Our blog entry has your blog link.

http://statsvak.blogspot.in/2012/01/from-crude-oil-to-petrol-bunk.html

Comments requested

Reply

21.


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anand paul 16. Feb, 2012 at 12:41 am #

very well documented ad explained .language was used is lucid and at the same time

informative.

nice one !!!

Reply

22.

Shago 02. Mar, 2012 at 10:32 pm #

Why dont express your views on diesel price deregulation also?

Reply

23.

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