Price puzzle – The Hindu BusinessLine

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Greater transparency is needed in fuel pricing

The pricing of petrol and diesel in this country is a mystery that befuddles all. The oil marketing companies need to explain why prices are not always market-linked and stay frozen for extended periods. The government, for its part, should answer why it is not taking steps to ensure that retail pricing rules are always followed. International crude oil price declined by 17 per cent between July 13 and August 20 this year. This should have provided relief to consumers, who were paying around ₹100 per litre at petrol pumps across the country. But retail selling prices of petrol and diesel have remained almost unchanged in this period. The rupee-dollar rate, which is an input in the pricing formula, has been largely steady in this period. This is not the first time we saw such an anomaly. Often, prices tend to freeze prior to elections. This goes against the principle of decontrolled retail prices of petroleum products. Since mid-June 2017, pricing of petrol and diesel are being computed based on a daily pricing mechanism based on 15-day rolling average international rate. This method can result in a lag between price-changes in domestic market when compared with international prices, but it cannot result in a standstill price.

Besides the ad hoc manner of price revisions, there are other fundamental flaws in pricing. Though India is self-sufficient in petrol and diesel refining and does not have to import it, the base prices are calculated based on trade parity. This formula is based on the prices in international market assuming that 80 per cent of petrol and diesel is imported and 20 per cent is exported. The price so arrived at is converted into rupees and cost of freight, marketing, refiner’s margin and dealer’s commission is added to arrive at the pre-tax price. Since the retail prices have no link to the actual cost incurred by the producers, there is cartelisation by these producers with all of them pricing petrol and diesel very close to each other. The right way to arrive at the price would be to use the actual costs incurred by refiners in sourcing crude oil, cost of refining, plus a profit margin. This method can result in different selling price among refiners based on their operational efficiency, which is good for consumers. With private refiners such as Reliance Industries and Nayara Energy (formerly Essar Oil) having more efficient refining plants, their costs are likely to be much lower when compared to PSU refiners.

With both the Centre and the State governments unwilling to roll back excise duty rates — except Tamil Nadu which cut taxes by ₹3 a litre recently — to provide relief to consumers, better transparency in fuel pricing can provide some succour. With transportation cost accounting for a large portion of household budgets and rising retail prices having a trickle-down effect on other products in the economy, this muddled manner of pricing petrol and diesel is having a far-reaching impact.

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