The global crude prices have fallen more than 70% in the last few months from a high of $147/barrel in July to a low of $36 in mid Dec. This is a 5yr low for the crude price. In most countries that have market linked pricing the price of gas at the petrol pumps has come down by a similar margin. However in India there has hardly been any movement in price. Whatever hike the Govt implemented in mid-year (Rs.5/lt for petrol, Rs.3/lt for Diesel, Rs.50/cyl for LPG) has been rolled back partially (Diesel was reduced by Rs.2/lt only and LPG price has not be revised). The objective of this article is to analyze why the petrol price in India is still high despite crude prices being at 5yr lows.
As part of my research I checked out the following aspects. I will be detailing each of these below:
- Crude price movement in 2009 & Average crude basket price in India
- Pricing components of Petrol price in India
- Comparison of pricing components in India with pricing components in US
- Gross Refining Margins of OMC’s
- Profit/Loss of Govt owned Oil Marketing Companies(OMC’s) which control a 80%+ market share
- Govt policy- Administered Pricing Mechanism(APM)/De-regulation of oil industry
While the price of crude has reduced drastically over the last six months if you notice the attached chart(Source: CBS Marketwatch) a big chunk of the reduction has come in Q4, 2008 only. The price came below $100/barrel in early October, below $60 in November and below $50 in early Dec. Technically price has been below $100/barrel for a little over 2 months now. This needs to be taken into consideration for the timing of price roll-back. We will come back to this later in this article.
One more factor that needs to be considered is the Exchange rate. US Dollar has appreciated by close to 20% this year against Indian Rupee. While the crude price has gone down the OMC’s will be paying around 20% higher price in Indian Rupee terms due to the exchange rate.
India imports around 70% of our crude from outside and the rest 30% is produced locally thru upstream oil companies like ONGC, Oil India ltd etc. The crude sale price of these upstream oil companies is fixed and they sell oil to OMC’s at $55/barrel irrespective of international crude price. So the average price of crude basket of OMC’s will be lesser than market price of crude as around 30% of the crude is purchased at $55 fixed price. As an example if the market price of crude is $140 the average Indian crude basket price will be $114.5 (average of 70% crude at $140 & 30% crude at $55). The average monthly crude basket price for IOC for last several yrs (Average price of imported crude only) can be found here:
You could use this to arrive at average crude basket price for IOC overall.
The pricing of the petrol in India is pretty complicated. I have detailed the same in the below table:
Based on the attached calculation the price of crude is only around 36-40% (based on how you calculate) of the total price that we pay at the pumps. There are way too many levels where we are taxing this needs to be simplified. Secondly there is lot of fixed price components in this. This needs to be changed to variable component as a % of crude or petrol cost so that it can vary relative to crude price. The current fixed pricing structure is beneficial for Govt whereby irrespective of crude price changes Govt get fixed revenue(easy for budgeting). At higher crude prices the overhead is reasonable/comparable to global standards however at lower crude prices the overhead is really high.
In order to see how our petrol taxation compares globally I wanted to compare the various price components of petrol in India with US. Refer the attached chart for details.
Though the refining cost in India seems to be much lower than US in the attached chart in actual it is similar. Here refining cost if represented as a % of the price of petrol and petrol price in India is much higher than US. Hence the numbers looks skewed. In the same context our distribution costs are much higher than US.
At $65/barrel the average price per gallon of petrol in US is $2.6 & average price per gallon in India is $4.1 (arrived at based on above table). The gas price in US is around 35% cheaper than in India. Due to fixed rate structure of duties/tax on petrol price in India the gap will become bigger as the crude price goes below $65 and will become smaller as crude price goes above this mark.
To be continued. In the next part I will be covering about GRM, profit/loss analysis of OMC's, APM/de-regulation and my prediction on if and when gas prices would be reduced in India.
