Oil Companies - Pricing Policy

What is the issue?

The pricing policy adopted by oil companies for petrol and diesel needs review and they should be brought under GST at the earliest.

What is the need?

• While announcing a price cut recently,  the Centre urged States to reduce their levies on the fuels (petrol and diesel).
• Despite some states making rate cuts, Bihar has appealed to the Centre to reduce the base price of petrol and diesel.
• It has pointed out that VAT on petrol and diesel in Bihar was among the lowest.
• This highlights the need for shifting the focus to the pricing policy followed by the oil companies for the two fuels.

What is the flaw in the pricing policy?

• Change in policy - Prices of petrol and diesel were deregulated in 2010 and 2014 respectively.
• Consequently, prices are market-determined i.e. by the forces of supply and demand rather than input costs.
• Since deregulation, the Public Sector Oil Marketing Companies (OMCs) are allowed to take appropriate decisions on petrol and diesel.
• From June 2017 dynamic daily pricing is being followed.
• Under this, the retail selling prices of petrol and diesel is revised daily, based on average international price and the currency exchange rate.
• Flaw - Despite the changes, oil companies still follow policies dating back to the controlled pricing era.
• According to this formula, retail prices are linked to imported landed cost and export parity price of the two fuels.
• This is despite the fact that petrol and diesel are not imported but refined within the country, with imported crude oil.
• This trade parity pricing being followed is unsuitable in the current free pricing regime.
• This only results in offering undue protection to domestic refineries.
• Anomaly - The prices of fuels refined from crude oil should be linked to the cost of crude plus the refining and transportation costs and margins.
• By this, ideally, coastal States and those with refineries in their vicinity should be paying a lower price.
• States in the hinterland where transportation costs involves should pay a higher price.
• However, this is not the case at present, due to unregulated pricing by companies.

What should be done?

• The Centre should get the oil companies to review their pricing strategies and align them with the free market approach.
• Besides, inclusion of petrol, diesel and other fuels under the GST would benefit oil companies and aid them in reforming the fuel pricing strategies.

Quick Facts

Trade Parity Price

• Trade Parity Price (TPP) is the weighted average of import parity price (IPP) and export parity price (EPP) with weights of 80 and 20 respectively.
• IPP is the price importers would pay in case of actual import at Indian ports, while EPP is the price oil companies would realise on export.
• In short, the pricing assumes that 80 per cent of the petrol and diesel is imported and 20 per cent is exported.
• Rather than showing the daily changes in the TPP and the rupee values, oil companies are adjusting price differences in the daily prices charged to dealers.
• This gives the impression that the amount is going unfairly into the oil companies’ coffers.

Source: BusinessLine