Redefining and Refining of Petroleum Product Price

 Dipankar Mukherjee

MARKET fundamentalists had a free run along with religious fundamentalists during the 6 years of Vajpayee regime. They had hardly any concern for the burden on the common man and the poor when the diesel, petrol and LPG prices were doubled during this period and the kerosene price rose by 4 times. The free market wallahs applauded them and urged them to reduce the price of aviation fuel only, so that air travel could become cheaper. However, when the election time came and the international crude oil price increased sharply, the NDA government for political reasons did not hike the prices. Incidentally, when the Election Commission asked the then government whether the price hike arising out of global oil price was being avoided for electoral reasons, the then government through petroleum secretary informed that the oil companies had enough cushion to absorb the global price rise, which was vehemently denied by oil companies, both public and private. Such contrary signals were possible because of the absolute opacity surrounding the oil pricing system after dismantling of the administrative pricing mechanism (APM) by the NDA government in 2002. It is true that in principle the decision of dismantling the APM was taken during the United Front rule in 1997, but it is equally true that the Left parties and the CPI(M) in particular had opposed that decision.

WHY WE OPPOSED

India had decided to go in for indigenous oil exploration, refining and marketing through public sector in the wake of an oil crisis in the mid-sixties, basically for one reason --- to countervail the cyclic fluctuation of global oil price which had a cascading effect on the economy of developing countries. 

India can today be proud of its achievement of reaching 100 per cent self-sufficiency in oil refining. But the country is lagging behind in the area of oil exploration. Our dependence on import of crude has gone up from 30 per cent at one stage to 70 per cent at present. However, the entry of private investors, both Indian and foreign, to supplement the public sector in exploration and refining led to an intensive pressure on successive governments to dismantle the APM. Private investors insisted on having import parity in the pricing of both crude and petroleum products which meant that both the crude ands product prices within the country would be fixed at par with global prices, irrespective of the actual exploration and refining cost within the country.

However, this thing actually went against the major objective of self-reliance which was to protect the large section of Indian poor and lower middle class, who use kerosene oil, LPG, public transport etc, from the vagaries of global oil price, dictated by the USA and its giant MNCs. Today even if we produce and refine oil at a cheaper price in the ONGC, IOC, BPCL or HPCL, we cannot take advantage of the same as the price would be at par with the global oil price, irrespective of the actual production cost. This scenario was anticipated and that is why we had been questioning its rationale being given out in the name of ‘reforms.’

TRANSPARENCY IN COSTING

The NDA government did not initiate any steps towards the cushioning of adverse impact on the people after dismantling of the APM. The tax structure was not restructured and there was no consumer counselling in the form of making pricing mechanism of the petroleum products transparent before the people. The UPA government’s decision not to hike kerosene price and to reduce excise duty for LPG and diesel is a step in the right direction, intended to ease the burden on the common man. However, the pricing mechanism for petro-products is still very hazy and unclear. If we start from the crude price, the following table shows the trend of international oil price during the last four years:

                                                                        Crude FOB

                                                              (Figures in Dollar/Barrel)

                                                          ---------------------------------------------------

                                                                Average for 2001                24.47

                                                                Average for 2002                24.90

                                                                Average for 2003                28.83

                                                                January 2004                       31.18

                                                                February 2004                     30.91

                                                                March 2004                          33.79

                                                                April 2004                            33.24

                                                                May 2004                             37.76

                                                                June 2004                             35.73

                                                          (up to 16.06.2004)

                                                         -----------------------------------------------------

It is interesting to see that the profitability of oil companies have increased in 2002 and 2003 after the introduction of import parity and in spite of crude price increase in 2003. Even for the quarter January–March 2004 when the crude price was very high and there was no revision of product price and there was a huge hue and cry about the losses to the oil companies, the profit before depreciation, interest and tax (PBDIT) of the IOC was more than what it was during January–March 2003. In case of the HPC, it was less by Rs 157 crore only. The figures for all other oil companies should also be checked, specially the profitability of the private oil giant which is still involved in the refining business only and has not gone into the retail marketing of the products. This would give a correct picture of profitability of these companies vis-à-vis the crude price fluctuation in the global market. It is not also clear why the net profit, instead of PBDIT, is being highlighted to show the loss to the oil companies because of non-revision of retail prices.

MYSTERY OF IMPORT PARITY PRICING

On the import parity, the following pricing data of diesel, as available, leave many questions unanswered: FOB crude price --- 35.73 dollars per barrel; FOB high speed diesel (HSD) price --- 42.74 dollars per barrel.

From the table alongside, it appears that the conversion cost of 20 per cent has already been covered in the global price at the supply end. The loaded price of 42 dollars per barrel is further computed on the basis of notional customs duty, insurance, ocean loss etc to arrive at the cost of the product at the refinery end to cover up the refining margin in the oil companies to arrive at the figure of Rs 15.12 per litre. How far is the double loading on Indian consumers in this manner justified?

If the APM assured oil companies a guaranteed return of 12 per cent and that was construed as a part of government control, then how is it that the 20 per cent customs duty i e Rs 2.5 per litre be treated as market driven and not government administered? This customs duty is not actually going to the government fund; it is only a mechanism to ensure a refining margin for the oil companies. The question therefore arises as to on what basis this duty is being decided. There is scope on this score for the biggest private Indian player in refinery to garner extra benefit at the cost of consumers at the bottom end. This costing factor gives a scope to reduce the price of diesel after ensuring a reasonable profit to the oil companies.

If the Indian consumers have to absorb the imported price of petroleum products on global parity, then they should have the right to ask the public sector oil companies like the IOC, BPCL, HPCL etc to purchase the refined product from the global market on competitive basis, against the present practice of purchasing the same on preferential basis from Indian private refineries. Is it acceptable?

CONSUMERS CAN BE UNBURDENED

Along with the table showing the refinery transfer price mechanism, if the retail selling price break-up is also scrutinised, it can be seen that against an import price of Rs 12.5 per litre of diesel, more than Rs 10 is being charged on various taxes and duties to make it Rs 22.74 per litre to a consumer in, say, Delhi. This non-fuel component of Rs 10 increases with the rise in global crude price. There has to be a ceiling on this non-fuel component so that the consumer is not doubly burdened with both fuel and non-fuel price hike.

In case of LPG, this notional customs duty is Rs 1.5 per litre. In case this is reduced to Rs 0.75 per litre, the price rise of Rs 20 per cylinder can be avoided. Keeping this in mind, the Left parties have already asked for withdrawal of this hike in LPG price.

In the case of loss of the ONGC, which is being talked about, one should not lose sight of the cess of Rs 1800 per tonne charged by the government on the oil produced in the ONGC and OIL. (Incidentally, it was the NDA government that increased this cess from Rs 900 to Rs 1800 per tonne, two years back.) The cess is collected under the OID Act 1974 for the development of oil industry. In the present scenario when the oil sector has been opened up for private investment, this fund has lost its relevance. Moreover, out of Rs 37,000 crore collected under this fund, hardly Rs 902 crore has been channelised to the oil industry development board for this purpose. Withdrawal of this cess gives a relief of Rs 5,400 crore to ONGC. Alternatively, the money collected through cess from the ONGC and OIL can be utilised by the government as a cushion to ease the burden on the consumers of LPG, kerosene and diesel.

It is therefore quite clear that there is ample scope for a re-look at the pricing mechanism of petro-products in the interest of the common man. The profitability and sustainability of the oil companies has to be protected but artificial profitability at the cost of inflation in the country has to be checked. The new government should take up this challenging task with an open mind, without succumbing to the hue and cry of the market fundamentalists.

                                            Refinery Transfer Price (RTP) w e f 16.06.2004