Dynamic pricing has left the Indian fuel retailers worried about their profit margins.
What is dynamic pricing policy?
This means that the prices of these transport fuels are changed daily by the OMCs based on the movement of international crude oil prices.
Prior to this, the revision in fuel prices happened on a fortnightly basis.
It is part of an effort to remove the burden off subsidies on the exchequer & the Oil Marketing Companies (OMCs).
It smoothened out price fluctuations & thereby benefited OMCs and the consumers.
Why are the retailers worried?
In the previous regime of fortnightly change in fuel prices, the retailers managed their inventories based on expected prices.
But with a business requirement of stocking for a much longer period than a day, daily fuel prices left the retailers worried about their fixed profit margins.
With the current fixed commission of Rs 2.2/litre on petrol and Rs 1.5/litre on diesel, the net profit for a dealer at the end of the month will be dependent on the way the dealer manages overhead costs, transport, working capital, etc, and not the inventories.
e.g. To sell high priced inventories at low prices, will be disincentivising.
The same situation will also arise when crude oil prices become highly volatile without any clear downward or upward direction.
Retailers lost as much as Rs 400 crore in the first two weeks of the roll-out of the dynamic pricing.
This has the potential to introduce inventory uncertainties and disrupt the well established smooth supply chain.
