Monday, November 8, 2010

Why oil companies in India hike petrol price so frequently?

The public sector oil companies have increased the price of petrol by 33 paise. This follows an increase in October of 70 to 72 paise per litre and September of 27 paise per litre. By deregulating the petrol pricing during June this year, the government has opened the way for successive hikes in petrol prices. The rise in petrol prices will further fuel inflation. The people who are suffering from continuous food inflation will be more burdened. There is no transparency in the pricing decision making.

The Government advertisement says India imports petroleum products. India imports crude oil, it does not import petroleum products. Crude oil is refined in the refineries in India to produce petroleum products like petrol, diesel cooking gas, kerosene etc. before marketing. India imports 75 to 80 per cent of its crude oil requirements. However India is more than self sufficient in oil refining and produces more petroleum products than the domestic requirements. In the year 2009 – 2010 (April-December) it has exported 28 million tonnes petroleum products against an import of 10 million tonnes.

Let us see what the Petroleum Ministry says in its annual report of 2009-10 on Indian Oil Corporation (IOC), the major public sector Oil Marketing Company (OMC):
During 2008-09, IOC posted net profit of Rs. 2,950 crore on an unprecedented turnover of Rs. 2,85,337 crore that too after holding the price line for the four major products – petrol, diesel, PDS kerosene and LPG for domestic use. IOC is also the first and the highest ranked Indian company in the Fortune `Global 500’, placed at 116th position by sales in 2008. It is the 18th largest petroleum company in the world. The profit (after tax) for the year 2009-10 (upto December 2009) is Rs.4663.78 crore, whereas the turnover for the said period is Rs.208289.46 crore”.

Further, as per the Audited Financial Results for the year ending 31.3.2010 IOC’s net profit has been shown as Rs.10,998 crore with a reserve and surplus of Rs.49,472 crore. The Other two marketing companies HPC and BPC have earned profits of Rs. 544 crore and Rs. 834 crore during April-December, 2009.

About deregulation of petrol prices

Suppose a pair of shoes is made in Italy which costs 1000 rupees. Suppose India imports the Italian leather but makes the shoes, including the cost of Italian leather, at a much cheaper cost, of just 600 rupees. Suppose the company says that you have to pay 1000 rupees in India because that is the import parity price otherwise the company will suffer an under recovery of 400 rupees! Will you not protest about a notional calculation on the basis of the Italian cost not the Indian cost? 

But that is exactly what the Government is doing. It is making the unchecked international price of petroleum products as its base to calculate what the price should be charged in India! The oil companies are making a profit even after absorbing the subsidies for cheaper pricing of petrol products through the APM. But the bogey and myth of under recoveries is being used as the excuse to hike the prices. Under the cover of under recoveries, we are back to the decontrolled pricing regime based on import parity, when foreign oil companies were operating in the country.

After 2002, the private sector and domestic companies like Reliance and Essar wanted further deregulation. They were not satisfied with the steps taken by the BJP Government. The Kirit Parikh committee was set up precisely to address the demands of the private sector. This committee gave a report for complete deregulation of petrol
products. The present step of the central Government goes further than even the BJP Government and accepts the recommendations of the Kirit Parikh committee to reintroduce import parity pricing through deregulation, in the first instance of petrol.

Thus people of India are left at the mercy of the market.


Thomas George said...

Rice in petrol prices causes fuel inflation? I thought that was the *definition* of inflation -- rise in prices. Inflation is really not a commodity issue -- it is caused by printing money -- further necessitated by indiscriminate government spending. --- and subsidising fuel today will require printing more money tomorrow, and our children will face a much more devalued currency.

If you are really interested in the future of our country, please realize that shelling out universal freebies is not the way forward. Every individual has to shoulder the responsibility in nation-building; and that includes paying the price for what we consume.

Regarding food prices, farmers have been screwed by politicians. No one cares about land price rise (500% in 4-5 years), gold price rise. Almost everything has increased in price, yet the farmer is not allowed to price his produce freely, or even farm freely.

Thomas George said...

Regarding your leather example: If that company is a monopoly, it can charge Rs. 2000 and not even justify it with any parity calculations. Bring about competition in the petroleum industry, and allow them to price freely and not be tied to spot prices of oil futures -- you will see prices closely following actual costs.

And regarding under-recovery calculations, most corruption cases in our country are based on such notional revenue losses.