Dynamic fuel pricing: Dealers feel heat over increased risk, lower profits

Oil firms see no red flags yet; Practice is common globally, but was started in India on pilot basis

A fortnight into public sector oil companies offering dynamic fuel price change at five cities in the country, oil companies see no red flags, but dealers may be already feeling the heat.

State run oil companies have been offering the dynamic fuel price model at five locations-Pondicherry, Chandigarh, Jamshedpur, Udaipur and Vishakhapatnam since May 1. Though the practice is common globally, this has been introduced in India as a pilot project in the five locations.

"We have not received any feedback -- both negative and positive. So, it is doing well and also too early. No decision has been taken on the full roll out. There has been no issue in terms of implementation," said a marketing official from one of the three PSU oil companies.

This step from state-run companies has also seen private fuel retailers follow suit. Essar Oil, for instance, is offering the same fuel pricing at its pumps in these five locations. Reliance Industries, according to sources, is also offering dynamic fuel pricing at some of its outlets.

"We are currently having a pilot run of the scheme and dealers have been asked to submit the report on a daily basis. Once the pilot stage is over, we will come up with an overall report and take a call on the national launch," said B Ashok, chairman, Indian Oil Corporation.

Although the state run company officials added that the response would be monitored for a longer period, others like Essar Oil do not expect a drastic change.

"We have started dynamic pricing in those five cities. If all the ten outlets in the city are trading at an X rate, what can be the response, consumers are not going to defer a purchase to tomorrow," said Lalit Gupta, Managing Director and chief executive officer, Essar Oil.

However, dealers are already feeling the heat.

"We are currently in a troubled stage due to increase in risk and lower profitability. Our stock value has decreased by 5-6 per cent as petrol prices dropped by about Rs 3 per litre and diesel by another Rs 2 per litre in the last 15 days. This will lead to dealers in other areas taking advantage as well. We want companies to take up the losses that we have suffered in their own account. Or there should be some increase in dealer commission, which is between 2-3 per cent now," said Arjun Singh, president of Chandigarh Petroleum Dealers Association.

Industry analysts argue that the move has changed the price delta available to dealers to take a call on stocking up or delaying purchases.

"From a dealer's perspective, they used to pick up or hold back based on the expectation of price fall. PSUs on certain days had to supply more and on some there was a lack of demand, which led to mis-management of demand expectation, this will go away. Dealers will not have the pricing delta that they were playing on, but margins would remain. The business is being de-risked both the oil company and the dealer," said Rahul Prithiani, Director, CRISIL Research.

Consumers in these five cities were in for some luck, as the first fortnight also coincided with a fall in prices. Between May 8 and May 16, prices across the five cities saw a decline or remained stagnant on all days, except one. From May 1 to May 16, petrol prices in these locations saw a decline that ranged between Re.1.73 paise to Rs.2.26 paise, while the price dip in diesel was ranged between Rs2.26 paise to Rs2.38 paise.

"There must have been a small increase in volumes, but that is because prices have been falling, so consumer from the periphery may have fuelled tanks," said the marketing official earlier quoted in the story.