Falling crude puts OMC pricing under scanner

There is a large gap in the extent of fall between oil and petrol prices; pricing mechanism of OMCs is opaque and complex

November 22, 2018 10:26 pm | Updated 10:26 pm IST - NEW DELHI

Are oil marketing companies recovering the ₹1 per litre price cut of October 4 which they had made on the Centre’s instructions and absorbed into their financials?

While oil marketing companies (OMCs) deny that they are doing so, , analysts argue that the pricing mechanism is so opaque and complex that there would be no way to tell even if they were recovering it.

The government had, in early October, said it would cut the excise duty on petrol and diesel by ₹1.5 per litre each, and that oil marketing companies would administer a further ₹1 per litre cut in the price.

At the time, the OMCs had said that the total effect of this on their finances would amount to ₹4,000-₹5,000 crore in this financial year.

“The government asked OMCs to absorb that ₹1 cut in price, so there is no question of us recovering it,” Indian Oil Corporation said in response to queries from The Hindu . “We have given our calculations for what impact this would have fiscally.”

Since October 1, the Indian basket of crude oil has seen prices fall almost 24% as of November 21, whereas the price of petrol has fallen only 8.8% during that period. While this disparity in price levels can be explained to some point by the manner in which petrol prices are set in India, analysts say that this does not explain the large and growing gap between oil and petrol prices.

“One can’t expect petrol prices in India to move exactly as oil prices do,” one sector analyst said on condition of anonymity. “But there is no reason why there should be such a divergence between prices for such a long time. One can understand if the price reduction in petrol comes with a delay, but not if it doesn’t come at all, or only barely. They might be absorbing the ₹1 amount, but even that is not enough to explain the disparity.”

“In the Indian basket, there is always a lag that happens with crude price changes, since the procurement happens at a certain point of time, and the pump prices follow later,” Anish De, Head of Energy and Natural Resources at KPMG in India, said. “Further, while there will be a reduction in fuel prices if oil prices reduce, there won’t be by the same percentage. The reason is that it is a supply chain of which crude is one part. There is shipping, refining, supply and distribution, etc. Those are relatively fixed costs that do not vary with the price of oil.”

A complex process

“Petrol pricing is a complex process, difficult to be known to other than those directly involved,” Deepak Mahurkar, partner and leader — Oil & Gas Industry Practice, PwC India, said. “The international products, whose basket we use for pricing petrol products, do not move immediately and in tandem with the crude oil prices. There can be a lag. Arbitrages also change. The price stack up also includes in-land costs, over and above international products prices. The OMCs bear costs including dealers’ commission.”

These various components in pricing add to the opacity behind how the final retail price is determined. For example, if the global price is $65 per barrel, then there are transportation costs, cross-subsidy losses, handling losses, export parity price, dealercommission, and then taxes added to this.

“What they tell the Petroleum Ministry is that they are absorbing the ₹1 cost, but there is no way to tell if they are simply adding this ₹1 back into the pricing somewhere down the line,” the sector analyst added. “With oil prices and global petrol prices falling, this would be a good time for OMCs to be incorporating that ₹1 somewhere, and still cut petrol prices by some amount.”

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