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Economics of Petrol Pricing

Posted in Finance Articles, Total Reads: 7556 , Published on January 16, 2011

The entire country was looking forward for a better year as compared to 2010 with less frequent price hikes and lower inflation. However the euphoria came to an abrupt halt by a move which will severely affect the common folks’ life. Oil Marketing Companies led by Indian Oil Corporation have yet again hiked the price of petrol. Petrol prices, starting from midnight today will be Rs 2.50 dearer across India. And this the second similar hike in under a month and each time the reason being the global increase in crude prices, which has now touched $92 per barrel. The last petrol price hike of around Rs 2.90 was on December 16th, 2010.

Petrol Price Rise

Since the deregulation of petrol in June 2010, the prices of petrol have been increased 6 times and have gone up by more than Rs 7/ litre. Agreed that the price of crude in the international market is increasing but does that justify skyrocketing petrol prices. So this can be better understood by understanding the economics behind pricing petrol in the Indian Market. The current crude oil price in the international market is $92 per barrel, or nearly Rs 4232. Each barrel holds 42 gallons, or 158.76 litres. The crude oil price per litre thus comes to Rs 26.65 a litre. Add to it the cost of refining it to petrol or diesel which is approximately 50 paisa a litre. Add another Rs 12 as capital cost for the refinery and transportation costs. It adds up to a costing of Rs 39.15, which is nearly 40% less than the Rs 65.5 you will be paying for a litre of petrol in Bangalore from Sunday.

So which means the total cost of one litre of petrol for an Indian consumer should be approximately Rs 40. However we are paying almost 40% more. So where exactly is the other 40% going. This is what governments — both the Centre and state — take from you in the form of customs duty, excise duty, special excise duty, education cess, sales tax and state cess. Add to it, the cost of marketing and the commission to oil dealers. The table shown below tells how much we are paying under each head for one litre of petrol.


Petrol Economics


The Oil Marketing companies are not at fault but it is the government which is causing all the problems.  If the OMC’s don’t increase the prices they are sure to go bankrupt in the near future. So it is the responsibility of the government to either compensate the OMC’s in the form of subsidy or reduce the duties / taxes on petrol.  They can actually think of employing a price band which is the acceptable price of petrol in this country. If the price increases beyond the band they should think about reducing the duties / taxes levied on it. So till the time they think in that direction the price of petrol is going to remain high.

The deregulation of petrol has both pros and cons but in the case of developing economy like India, the consumers would be at a disadvantage as it is clearly showing since deregulation. The issue of deregulation of diesel is yet to be taken up which they have set it aside saying that it is used by transporters and would result in high inflation. Looks like the government has shut it eyes and ears as a large number of cars that run in the Indian market are on diesel. So the government is actually subsidizing the fuel used by the people who own BMW’s and so on. The current government has seriously failed in containing prices and seems to have forgotten that they came to power on the back of aam - aadmi slogan. So looks like with this government, year 2011 is going to be no different.


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