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February 14, 2015
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Crude oil prices have fallen steeply, but are the benefits being passed on fully to the consumer?

Photo: J. Manoharan
Photo: J. Manoharan

Petrol prices have not declined as dramatically in India as global crude oil prices have in recent months, but then what is the scale of the disparity?

Consumers might think that they should be paying much less for petrol, after all the price of crude has halved but that of petrol has not. The retail prices of petrol are market-determined and have been so since mid-2010. Consumers have been used to consistent increases when crude oil prices have been on the uptrend. Should not the trend by markedly different when crude oil prices fall so steeply?

But the patterns of the fall in prices are disparate: the curve is quite steep for crude oil prices but not so for petrol. Why is that?

Monthly average price of crude oil/barrel in dollars (Indian Basket)
Month-end price (in rupees) of petrol/litre in Delhi at IOC outlets

The answer partly lies in the components that make up the price of petrol, particularly the markup and taxes. If these go up, the drop in petrol prices in the local market will not mirror the decline in global crude oil prices. (This comparison is meant to be indicative and does not take the latest prices into consideration.)

Price component
(HPCL, Rs/litre in Delhi)
Feb 16, 2014 Jan 2, 2015 Share of total
price in
Feb 2014
Share of total
price in
Jan 2015
Changes
Price paid by oil companies to refineries 46.05 27.25 26.42,46.05 34.14,27.25 Steep fall
in prices
Price fixed at the dealer level 48.90 33.73 23.57,48.90 27.66,33.73 Oil companies
increase mark-up price
Specific excise duty 9.48 15.40 72.47,9.48 61.39,15.40 Excise duty too
increases significantly
Dealer commission 2.01 2.03 72.47,2.01 61.39,2.03 Virtually unchanged
VAT 12.08 10.23 72.47,12.08 61.39,10.23 VAT decreases
Retail price 72.47 61.39 72.47,61.39 Prices down; but further fall neutralised by other components

One crucial element in the make-up of petrol prices is the dealer level component, the mark-up. This component, which oil companies set, does not truly reflect the global price fall.

Compare this price with what the oil companies pay to the refineries. About a year ago the difference between the two was not much - about 3 rupees. By last month, this gap had widened - the refinery price was Rs 27.25 while the dealer price was Rs 33.73 - a difference of about 6 rupees.

The government is another player in pushing prices up or down - excise duty has gone up by about 6 rupees during this period. VAT and excise duty accounts for a significant part of the price.

So the bottom line is however much global oil prices fall, do not expect it to make that much of a difference when it comes to the retail price you pay for petrol. The situation is different, of course, when prices go up. Well if it is any consolation to consumers, this phenomenon is not unique to India, it is seen in other countries as well.

Charts: T. Ramachandran. Data source: Oil company websites; Petroleum Planning and Analysis Cell

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