Petro price increase: winners and losers
BHAMY V SHENOY
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Demystifying perceptions on profits and returns
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After waiting for many months the central government finally increased the prices on June 5. Even after the price increases and adjustment to tax rates both by the central and state, oil marketing companies are continuing to bleed. But there is total confusion in the minds of general public that oil companies are earning huge returns and the government is collecting large amount through taxes. However the reality is different. Because of the self interest of political leaders the oil sector is likely to transfer more than Rs. 1,85,000 crores from the poor to rich and the middle class this year.
Let me try to unravel the mystery behind the petroleum product prices using the example of diesel. At crude oil price of $120 per barrel, raw material cost to make one litre of diesel is Rs. 31.70. When crude oil is distilled in a refinery, along with diesel, petrol, LPG, kerosene, furnace oil, etc., are produced. Product like furnace oil is discounted. This results in most products like diesel commanding a premium over the crude oil. At present diesel is able to get a premium of Rs. 7.34 per litre which reflects the refinery fuel cost, operating costs, and refinery margin. In addition there is also transportation cost to move diesel from refinery to petrol stations and dealer margin. This adds up to Rs. 2.3 per litre. Thus the total cost of supplying diesel is Rs. 41.34 per litre with out any taxes. At the current diesel price of about Rs. 39 per litre, oil marketing company loses Rs. 2.34 per litre. In addition they have to pay central excise and cess of Rs. 3.57 and state sales tax of Rs. 9 per litre.
Extent of loss
Thus total losses would be Rs. 14.91 per litre. Based on these product prices refinery profitability is Rs. 0.40 per litre only and can hardly compensate for the huge marketing loss.There are similar losses incurred while selling petrol, kerosene and LPG. They are Rs. 5 to 8 per litre for petrol, Rs. 33 per litre for kerosene and more than Rs. 350 per cylinder for LPG. Some political parties have argued that the government should have windfall profit taxes on oil and gas production. This is a sound argument. But this will not have any impact on product prices. Most of the oil production in India is by public sector companies and they are already forced to share their profit with oil marketing companies. This is a wrong policy to siphon off cash flow from ONGC and Oil India. They could have used this to explore for oil and gas reserves to contribute to India’s energy security. All of us should realise that in one way or the other India has to pay for higher oil prices since more than 75% of crude oil is imported.
There are three types of stakeholders who have to pay for the increase directly or indirectly: rich and middle class who own cars and two wheelers who have above average energy consumption propensity, very poor and lower middle class who consume very little energy and petroleum product dealers and PDS shop owners.
Who is to pay?
The first category of stakeholders who can easily pay for any increase is the sure winner. The last category is even a bigger winner since they will be able to continue to adulterate the product they sell with subsidised products like kerosene and by diverting residential LPG to commercial sector. It is the poor who are supposed to be the beneficiaries of subsidy largesse are the losers in several ways. The poor not only not get their quota of subsidised kerosene, they will end up being the victims of greater inflation caused by higher oil deficit. Poor also do not use petro products.
In recent months the government has come under great pressure not only to reduce petro taxes, but even to transfer funds from other sources to support lower oil prices. This will only reduce the funds available to meet the welfare needs of the poor. It is high time that the government decides to hand over the responsibility of fixing product prices to oil companies as intended when APM was dismantled in 2002. They can continue to assist the poor by distributing subsidised products through smart card as recommended by the planning commission.
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