It's parity not costs in fuel pricing in India

Petroleum product trading in Asian region mainly takes place in Singapore

LPG, kerosene, diesel and petrol prices are bench marked to global prices. These benchmarks are used for calculating desired price of the fuels as well as the revenue loss incurred by oil marketing companies (OMCs) on selling below that price.

Oil companies were allowed to revise price of petrol in accordance with international prices and exchange rate in June 2010 and diesel price since this January is moving towards market price. Non-subsidised LPG cylinder too is marked to international price.

The Singapore region price for petrol is used for this purpose. In the Arab-Gulf region price for diesel, kerosene and LPG, there is no link between the Indian Crude oil basket and prices of petroleum products. Petroleum product trading in the Asian region mainly takes place in Singapore which is the primary trading centre.

Assessment of price of petroleum products for Arab Gulf market is determined through netback of freight from Singapore. Prices of petroleum products are dependent on the fundamentals of demand-supply scenario of individual product and other factors in the international market that impact these fundamentals.

Since the costs of an Indian refining company were based on imports with linkage to the crude oil price in the international oil market, the government decided to link the prices for finished products at the refinery gate on the principles of import parity with linkage to the prices for the respective products.

Under the present system of trade parity, companies calculate the retail price of petroleum products with 80% weight for import price and 20% for export. Import parity price for petrol and diesel comes with a tariff protection equivalent to 2.5% customs duty on these products.

Export Parity Price consists of Arab Gulf price without freight. This is why oil companies still run in profits despite the underrecovery costs. Earlier this protection was 10% and then reduced to 5% and was later made 2.5%. There is no protection in kerosene and LPG.

Since more than 90% of the refining cost of oil companies is crude oil, OMCs argue that the trade pricing mechanism should continue. But critics question the logic of using international benchmarks. Some say customers in India merit insulation from the volatilities of international prices.

Unlike import or trade or export parity, in a cost plus scenario, actual cost is generally calculated based on Brent crude’s daily price and delivery price at the refinery. The refineries can get a fixed rate of return over and above the cost incurred by them. This scenario was prevalent before the dismantling of administered price mechanism in April 2002.