Oil and Gas Sector – HELP, Open Acreage Policy, etc.

How fuel price decontrol works — or why consumers always lose out


From UPSC perspective, the following things are important :

Prelims level: Sweet and Sour grade crude oil

Mains level: Fuel prices hike and their impact

India fuel prices are somewhat stagnant these days despite spikes in global crude oil prices. The key beneficiary in this subversion of price decontrol is the government. The consumer is a clear loser, alongside fuel retailing companies as well. Let’s see how.

Do you know?

Grade of crude oil processed in Indian refineries:  ‘Sour grade’ (Oman and Dubai average) and ‘Sweet grade’ (Brent)

Oil and India

  • In theory, retail prices of petrol and diesel in India are linked to global crude prices.
  • There is supposed to be complete decontrol of consumer-end prices of auto fuels and others such as the aviation turbine fuel or ATF.
  • It means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.

So, why is there a divergence in the trends?

  • Oil price decontrol is a one-way street in India — when global prices go up, this is passed on to the consumer, who has to cough up more for every litre of fuel consumed.
  • But when the reverse happens and prices go down, the government — almost by default — slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer, who should have ideally benefited by way of lower pump prices.

How does decontrol work?

  • Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost and profits.
  • Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October 2014.
  • Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol.
  • While fuels such as domestic LPG and kerosene still are under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil.

Are India’s taxes on fuels high? Obviously, Yes!

  • On May 5, the Centre announced one of the steepest ever hikes in excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol, following up on another round of sharp hikes in the first week of March.
  • All of this effectively cements India’s position as the country with among the highest taxes on fuel.
  • Prior to the increase in excise duty (in February 2020), the government, centre plus states was collecting around 107 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 69 per cent in the case of diesel.
  • With the second revision in excise duty in May, the government is collecting around 260 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 256 per cent in the case of diesel (as on 6th May 2020), according to estimates by CARE Ratings.
  • In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the UK, 45 per cent in Japan and under 20 per cent in the US.

Do OMCs also benefit?

  • The only entity that benefits at the consumer’s expense is the government — in fact, both the Central and state governments.
  • OMCs, interestingly, are also among the losers from the sharp downward gyrations in oil prices.
  • The problem for companies such as IOC or BPCL is that a continuous slide in fuel prices leads to the prospect of inventory losses.
  • It is a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery.
  • Including both crude oil and products, companies such as IOC keep an inventory of about 20-50 days.

Also read:

[Burning Issue] Oil Prices and OPEC+

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