Transparent pricing

Petrol pump prices need to be reviewed

India has a complex mechanism to determine the prices of petrol and diesel at the pumps. Indian motorists paid in the range of Rs 90 to Rs 97 a litre for diesel in June 2022, when international rates were at $170 a barrel, and continue paying the same price now when the global rates have halved. The stated policy, however, is that pump prices will reflect fluctuations in international prices. State-run refiners use a combination of the import parity price (IPP) of fuel and the export parity price (EPP) to arrive at an industry price — in the case of petrol and diesel, they use 80 per cent IPP and 20 per cent EPP. The IPP is arrived at by taking the Arab Gulf S&P Platts assessment price, to which are added freight costs between an Arab port and India, insurance, port charges, and taxes. The rupee-dollar exchange rate is also factored in. Further, after calculating the delivered price at Mumbai port, inland pipeline costs and other logistics charges are added to calculate the refinery gate price. Finally, local distribution costs and marketing margins are added to calculate pump prices.

India is not only self-sufficient in petrol and diesel but exported $58 billion worth of oil products in 2022-23. However, state refiners are allowed to use the IPP. It can be argued that the imported crude oil price, on which India depends for 87 per cent of its needs, must be the benchmark. In June 2022, for example, diesel and petrol traded at $170 a barrel and $149 a barrel, respectively. But the price of crude oil was about $116 a barrel, around a third lower than that of diesel. Using crude oil as a benchmark would have lowered prices, but also reduced the profits of refiners. The fuel-pricing formula thus seems skewed in favour of state oil companies. Discounted Russian oil has further added to their benefits. State-run refiners have bought more than 300 million barrels of Russian crude oil since Moscow invaded Ukraine in late February 2022 — at an average discount of $10 a barrel, which amounts to $3 billion in savings. Moreover, Russian oil made up 46 per cent of India’s crude oil imports in May. It is, therefore, reasonable to argue that Russian grades should reflect in India’s formula to calculate the price of the crude oil basket. But the basket reflects the prices of Gulf crudes and Brent grades. It ignores cheap Russian oil.

Furthermore, since April last year, refiners have stopped following their own pricing formula and kept rates unchanged — despite high volatility in international prices and the exchange rates. Private-sector refiners and potential investors are waiting on the sidelines. It is thus imperative that the government review both its pricing policy and the formula to calculate pump prices to assuage the concerns of both consumers and investors. It is critical that fuel prices are transparent and competitive like any other good or service in a functioning market economy. It is possible that the government may like to extend support to some consumers in the case of a sharp increase in prices. Such support can be given directly to consumers or by compensating refiners. Opaque pricing will hurt potential investment.