People's Democracy

PETROLEUM PRICING STRUCTURE

Parity At Whose Cost?

Dipankar Mukherjee

THE system followed in India for pricing of petroleum products, the primary source of energy, is one of the key factors that will not only influence long term inter-regional growth but also cost of energy for the economy.  The pricing of petroleum products has to take into consideration socio-economic condition of the people based on a self reliant economic growth.

CHRONOLOGY OF KEY POLICY MEASURES

Pricing of petroleum products in India has witnessed several structural changes since independence. Initially the prices of petroleum products were fixed on import parity basis as the bulk of the crude oil and major petroleum products were being imported into the country from West Asia. As is well known, the crude oil is refined in refineries for getting the petroleum products ranging from kerosene to aviation fuel.  

The Shantilal Shah Committee, 1969, did not favour import parity as a concept, as indigenous crude oil production and refined capacity had become a considerable factor by that time.  However, import parity had to continue because of the commitments made to the foreign oil companies in the �refinery agreements� under which they had set up the refineries in India.  The Shantilal Shah Committee also fixed the norms for marketing margins and profits in respect of each product. The major consideration, therefore was, crude oil production and refining capacity within the country to switch over from import parity to domestic cost.

The Oil Prices Committee (OPC), 1976, recommended discontinuance of the import parity principle and called for the pricing of major petroleum products at the refinery point to be based on domestic cost, i.e. retention concept, by taking the delivered cost of crude oil, the cost of refining of crude oil and reasonable return on the capital employed.  They also recommended the retention concept for the marketing activities.  The retention concept was implemented for determining the ex-refinery prices from July 14, 1975 when the government accepted the Interim Report of the OPC.  This principle was extended to the marketing activity from December 16, 1977 when the government implemented the final recommendations of the OPC 1976.

The salient features of the Administrative Pricing Mechanism (APM) of petroleum products were as under:-

1.  The pricing of petroleum products for the refining and marketing units is based on the retention concept whereunder oil refineries, oil marketing companies and the pipelines are compensated operating costs and return @ 12 per cent post tax net worth.

1.  For consumers, the selling price of a product was arrived at by adding the applicable freight from the oil refinery to the Depot and from Depot to the Retail Outlets or direct consumers. Dealers commission, wherever applicable, was also added.

1.  The pricing mechanism, while taking the total cost into account provided for cross-subsidisation of various products, depending upon their ultimate use. For instance kerosene, diesel, LPG were subsidised as they were mainly used for transport and domestic consumer sectors. The subsidies were provided by charging higher price for other petroleum products.

DISMANTLING OF APM & IMPORT PARITY PRICING

The process of dismantling of APM started with decontrol of pricing of lubricant in November 1993. The phased dismantling started from April 1998 with total APM dismantling effective from April 2002 as a part of deregulation of petroleum sector. In import parity system the consumers are expected to pay the same price for domestic petroleum products as for imported petroleum products. It means, whether we refine crude in oil refineries in Haldia or Vizag, Jamnagar or Kochi, Mumbai or Chennai, the refinery gate price of the product will be determined by including the following components viz.

1.  Average fortnightly international price of the product viz petrol, diesel etc
2.  Ocean freight
3.  Customs duty (at applicable rates currently 7.5 per cent for petrol and diesel)
4.  Other charges like insurance, ocean loss etc

Public sector OMCs call it �under recovery�, if the above computed cost is not paid to them irrespective of their actual refinery gate price. The private one like Jamnagar of M/s Reliance sell a part of its products at import parity to public sector OMCs and export the remaining (about 50 per cent) at international price with the bonanza of domestic tax exemption at various stages.  

The point is if India's domestic refining capacity is 148.57 million tonnes of petroleum products per annum -- which is more than the domestic demand as on date and is leading to an export of more than 26 million tonnes in April-November 2007 -- why should we peg our domestic refining cost on import or global parity rather than the actual domestic production cost? Why should Indian customer pay more refining cost in 2004 just because the global price of petroleum product rose as Hurricane Katrina had damaged three refineries in Calorina state in America? Is there any scientific logic or rationale excepting that we are in globalization era where every commodity including food and even water (as per the reform-savvy prime minister) should be on import or global parity excepting the �WAGES�.

WHAT ABOUT CRUDE OIL?

Yes, global price of crude oil has surged up to record levels of $130 per barrel at one point because of falling dollar, speculation and cartelisation in the global oil market. But it is pertinent to note that about 25 to 30 per cent of crude required by public sector OMCs, are supplied indigenously by ONGC and Oil India Ltd @ discounted rate of $55 per barrel (private sector/joint venture oil producing companies who contribute very little compared to the overall crude requirement however charge at the prevailing international price, irrespective of the actual production cost). The average crude price to public sector OMCs, therefore, at such a point comes roughly to about $110 - $115 per barrel or about Rs 28 to Rs 30 per litre. Add refining cost of 20 - 30  paise/litre. Then of course the marketing cost and the reasonable profit, can be added to come to scientific product cost in a refinery (public or private) which should be placed before the people. Such a cost-sheet will clearly show:

•  Tax/duties are very high;
•  Under recoveries and losses are totally different parameters;
•  The concern should be on losses of public sector OMCs and not under recoveries;
•  Private sector oil producing companies and specially the private sector oil refineries are making super-profits, much beyond the reasonable limit of profit;
•  Last but not the least, in refining we are already self-sufficient and even if we become self-sufficient in crude oil production, what is the advantage of such self-reliance if we have to give the price of imported crude and petroleum products irrespective of actual domestic cost of production and refining.

The CPI(M) had opposed import parity policy in 1997 and time has now come to mobilise the people to force the government to go back to a transparent Administrative Pricing Mechanism (APM) with cross-subsidisation, keeping in view our self-reliance in refining and economic condition of more than 70 per cent of people earning less than $2 per day. If they can not be insulated from $130 per barrel global crude oil price, Mr Prime Minister, those in power will be isolated by them. Either insulate or be isolated.