Are we really paying the right price of petrol and diesel in India?

A History of global crude oil prices, prices and calculation of petrol and diesel in India

Do you know In last 60 years i.e., from 1956 till February 2016, Petrol and Diesel prices in India has

increased approx. 10,000 times (from 0.58 paisa per litre and 0.31 paisa per litre to Rs 62.52 per litre and

Rs 47.58 per litre of petrol and diesel respectively. Thus, we need to ask this prominent question from

our-selfs that are Are we really paying the right price of petrol and diesel in India? Not very far, if we

look at the retail price of petrol in India on 29th February 2016 which was 59.86 1 Rs /Ltr in relation with

the crude oil price of USD 31.862 per barrel3 comparing with the price of petrol on 1st December 2004

which was 37.844 Rs./ Ltr in relation with the crude oil price of USD 39.205 per barrel in India.

1 The price of petrol in India on 15th February was calculated from the data got from the website http://www.globalpetrolprices.com/gasoline_prices/ according to which it was USD 0.87 per barrel and the exchange rate was taken from www.xe.com which was 1 USD = Rs. 68.80 thus the price of petrol in India on 29th February in term of Indian Rupee was Rs 59.86 per ltr. 2 The price of crude oil was taken http://pib.nic.in/newsite/pmreleases.aspx?mincode=20 3 1 barrel = 159 liters

4 http://zeenews.india.com/business/news/economy/know-why-petrol-price-in-india-is-so-high-despite-oil-in-international-market-at-11-year-low_1834525.html5 http://zeenews.india.com/business/news/economy/know-why-petrol-price-in-india-is-so-high-despite-oil-in-international-market-at-11-year-low_1834525.html

Additionally below is the figure 1 &26 compares petrol and diesel prices in terms of USD per liter in

different countries (i.e., from 2014 till 29th February 2016).

Saudi Arabia

Kuwait

Malaysia

Dubai, UAE

Russia

USA

Pakistan

Australia

Srilanka

China

India

Japan

Bangladesh

Hongkong

New Zealand

Spain

Singapore

France

Germany

Italy

UK

$- $0.50 $1.00 $1.50 $2.00 $2.50

$0.16

$0.24

$0.69

$0.47

$0.76

$0.83

$0.93

$1.22

$1.26

$1.17

$1.11

$1.32

$1.07

$2.06

$1.72

$1.66

$1.58

$1.79

$1.80

$2.17

$1.93

$0.16

$0.21

$0.46

$0.53

$0.57

$0.73

$0.74

$0.93

$0.95

$0.99

$1.00

$1.07

$1.22

$1.23

$1.34

$1.35

$1.48

$1.52

$1.52

$1.72

$1.73

$0.25

$0.22

$0.38

$0.37

$0.48

$0.53

$0.68

$0.76

$0.88

$0.90

$0.87

$0.95

$1.27

$1.77

$1.22

$1.19

$1.26

$1.34

$1.28

$1.49

$1.42

Comparison of Petrol Prices in differnt countries (Base Year 2014)

$ per Ltr 29th February 2016 $ per Ltr 2015 $ per Ltr 2014Linear ($ per Ltr 2014)Petrol Price in USD per litre

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Source: globalpetrolprices.com, kshitij.com

Figure 1: Petrol prices in terms of USD per liter in different countries on 15th February 2016

6http://www.globalpetrolprices.com/gasoline_prices/ ,http://www.kshitij.com/research/petrol.shtml, http://data.worldbank.org/indicator/EP.PMP.DESL.CD, http://www.refinerlink.com/blog/Diesel_Petrol_Price_Comparison_25_Countries

Saudi Arabia

Kuwait

Malaysia

UAE

Russia

USA

Pakistan

Australia

Srilanka

China

India

Japan

Bangladesh

Hongkong

New Zealand

Spain

Singapore

France

Germany

Italy

UK

$- $0.50 $1.00 $1.50 $2.00 $2.50 $0.21

$0.38

$0.32

$0.38

$0.46

$0.52

$0.72

$0.80

$0.66

$0.79

$0.72

$0.81

$0.87

$1.27

$0.63

$1.06

$0.72

$1.11

$1.07

$1.30

$1.41

0.08

0.14

0.43

0.51

0.53

0.66

0.798594847775176

0.91

0.691491022638564

0.87

0.71

0.88

1.18021006080708

1.4

0.78

1.24

1.26

1.21

1.55

1.76

0.07

0.19

0.65

0.62

0.75

0.97

1.01

1.28

0.9

1.09

0.91

1.1

0.9

1.56

1.11

1.55

1.16

1.63

1.58

2.01

1.99

Comparison of Diesel Prices in differnt countries (Base Year 2014)

$ per Ltr 2014 $ per Ltr 2015 $ per Ltr 29th February 2016

Diesel Prices in USD per litre

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Source: globalpetrolprices.com, kshitij.com, data.worldbank.org, refinerlink.com

Figure 2: Diesel prices in terms of USD per liter in different countries on 15th February 2016

Above facts and figure is just a snapshot through which we can see clearly where we stand globally in

terms of retail price of petrol and diesel i.e., USD per litre as an end customer against how much

government is really paying for crude oil in the International market.

In this article, we will be discussing about current International crude oil market scenario, history of

Petrol and diesel prices in India, factors behind high price of petrol and gas in India, calculation and

component breakup of current petrol and diesel prices in India. And, in the end we will be discussion

who is benefitting from falling prices of crude oil in India.

Current International crude oil market scenario

A glimpse of history of International crude oil market

International crude oil market is highly dynamic and rivalry between crude oil producing countries is not

new that’s why like any other commodity, crude oil price also fluctuates depending upon the dynamics

of demand and supply ratio of crude oil. Since 20 th century, we had seen majorly four main crude oil

crashes happened so far which we will be discussing in detail in the next article. Additionally we will

discussing about the history of International crude oil market and its price fluctuations in detail. To show

a glimpse, below is the Figure 37 showing the history of fluctuations in crude oil prices from 1861 till

2015.

Source: Market Realist

Figure 3: History of fluctuations in crude oil prices from 1861 till 2015

Current International crude oil market scenario

7 http://marketrealist.com/analysis/stock-analysis/energy-power/upsteam-oil-gas/charts/?featured_post=924625&featured_chart=924637

High extraction of crude oil from the wells of US and Canada forcing OPEC nations to produce and pump more crude oil in order to protect its market share and growing tensions between two top oil producing countries in the world of OPEC nations in which both wants to be a dominant player in the International crude oil market i.e., tension between Saudi Arabia and Iran is working as a catalyst to fuel a very steep and abrupt plummeting of crude oil prices internationally due to the oversupply of the crude oil in the market in 2014 and 2015.

And thus, this led to the cause of severe crude oil market crash and International crude oil prices slashed by more than 70% since June 2014 as a result of which crude oil prices are closer to 11-year low. Addition to this, growing fear of the International crude oil market that this global oil surplus would get worse in the coming months if the price war between OPEC and non-OPEC countries continues and gets deepens. Moreover, negative impact of this over-supply of crude oil in the International market can be seen on US and Canadian oil and gas market players in the coming months because of their high breakeven point and high cost of oil extraction which can result into shutdown of the operations of these players due to very low crude oil prices. And, this plunging of crude oil price can trigger new default crisis for US.

History of Petrol and Diesel prices in India

In last 60 years i.e., from 1956 till February 2016, Petrol and Diesel prices in India has increased around 10,000 times. Furthermore, we see the inflation in the petrol and diesel pricing is more prominent in last 25 - 27 years, keeping many variables in mind for the price calculation of petrol and diesel such as sales tax, VAT, turbulences in international crude oil market due to price war between OPEC and non-OPEC countries i.e., the price of petrol and diesel in 1989 was Rs 8.50 per litre and Rs 3.50 per litre respectively in comparison to the price of petrol and diesel in February 2016 which is Rs 62.52 per litre and Rs 47.58 per litre respectively. In the below table 1, petrol and diesel prices are based on average of four metropolitan cities of India (i.e., Delhi, Mumbai, Kolkatta and Chennai).

Table 1: Prices of petrol and diesel in India since 1956

Year Petrol Price Diesel Price Year Petrol Price Diesel Price1956 0.58 paisa per litre 0.31 paisa per litre 2000 Rs 25.94 per litre Rs 14.04 per litre1958 0.66 paisa per litre 0.36 paisa per litre 2001 - Rs 17.06 per litre1962 0.68 paisa per litre 0.54 paisa per litre 2002 Rs 27.54 per litre Rs 17.09 per litre1965 0.81 paisa per litre 0.67 paisa per litre 2003 Rs 29.93 per litre Rs 19.07 per litre1973 Rs 1.52 per litre 0.83 paisa per litre 2004 Rs 36.49 per litre Rs 24.35 per litre1981 Rs 5.56 per litre Rs 2.61 per litre 2005 Rs 40.84 per litre Rs 29.77 per litre1985 Rs 7.34 per litre Rs 3.52 per litre 2006 Rs 46.76 per litre Rs 33.65 per litre1988 Rs 9.14 per litre Rs 3.36 per litre 2007 Rs 46.41 per litre Rs 32.68 per litre1989 Rs 8.50 per litre Rs 3.50 per litre 2008 Rs 48.65 per litre Rs 34.04 per litre1990 Rs 9.84 per litre Rs 4.08 per litre 2009 Rs 43.37 per litre Rs 32.76 per litre1991 Rs 14.62 per litre - 2010 Rs 50.98 per litre Rs 38.51 per litre

1992 Rs 15.71 per litre Rs 6.11 per litre 2011 Rs 61.47 per litre Rs 40.01 per litre1994 Rs 16.78 per litre Rs 6.98 per litre 2012 Rs 68.97 per litre Rs 43.47 per litre1996 Rs 21.13 per litre Rs 9.04 per litre 2013 Rs 72.68 per litre Rs 52.03 per litre1997 Rs 22.84 per litre Rs 10.34 per litre 2014 Rs 73.70 per litre Rs 66.79 per litre1998 Rs 23.94 per litre Rs 10.25 per litre 2015 Rs 65.69 per litre Rs 51.53 per litre1999 Rs 23.80 per litre Rs 9.94 per litre 20168 Rs 62.52 per litre Rs 47.58 per litre

Source: team-bhp.com, data.gov.in, in.reuters.com, iocl.com, petroleum planning and Analysis cell

Factors behind high price of petrol and diesel in India

In 2002 aviation turbine fuel (ATF) was deregulated by the government and thus going on the path of

deregulation in 2010 and in October 2014 petrol and diesel prices were freed by the government. Below

figure 39 gives a comparison of prices of crude oil, petrol and diesel in India (from 2004 to 2016).

Source: http://thewire.in

Figure 4: Comparison of prices of crude oil, petrol and diesel in India (from 2004 to 2016)

Although, on papers all the refiners were given pricing autonomy which means that price of petroleum

products would change as per the market prices i.e., the price of petroleum products would be market

driven and the fundamental benchmark for this would be the price of raw crude oil. But in reality,

government still controls the pricing of petrol and diesel prices in India thus there deregulation is

myth.

8 Petrol prices till 18th February 20169 http://thewire.in/2016/02/06/why-the-75-drop-in-global-oil-prices-isnt-reaching-you-20964/

Internationally crude oil prices has falling from their $115 peak in June 2014 and the price of Indian

Brent crude oil has falling from USD 110 per barrel in June 2014 to around USD 31.5 in February 2016,

thus the prices of Indian Brent oil crude has declined around 70%. But in reality the prices of petrol and

diesel prices in India has gone down only by approx. 15 % and 26 % respectively from base price of

petrol and diesel in India in 2014 i.e., Rs 73.70 per litre and Rs 66.79 per litre respectively which in terms

of INR would be Rs. 11 and Rs. 20 approx. respectively. Indirectly, government still controls the prices of

petrol and diesel in India through taxes such as Excise duty and VAT. In coming paragraph, we will learn

how government is still controlling petrol and diesel prices in India via series of excise duty hikes on

petrol and diesel from June 2014 till January 2016. The main reason for such inconsistency is the

methodology we use to calculate the prices of petrol and diesel in India. Below are the components

used for the calculation of petrol and diesel prices in India.

1. Cost & freight (C&F) price of gasoline

2. Entry Tax (if appl.), processing cost in refinery, margin & landing cost from refinery to OMC - (Refinery

Costs)

3. OMC Margin, Transportation & Freight cost, Landing cost from refinery to dealers

4. Pricing Charged to Dealers before VAT (Excise Duty as on 29th Feb 2016 (hiked further by 75paise on

Petrol and Rs 2 / Litre on Diesel)

5. Commission to Petrol Pump Dealers

6. Additional: VAT (Varies from State to State - 27% on Petrol & 18% on Diesel + 25p as Pollution Cess

with Surcharge)

7. Final Retail Price to the end customer after round-off

Calculation and component break-up of current Petrol and Diesel prices in India

Calculation of Petrol & Diesel Price for year 2016

As we know due to ballooning of price war between OPEC and non-OPEC nations as well as rising

tension between Saudi Arabia and Iran petrol and diesel prices are reducing steeply. And, this can be

evident from frequently changing fuel prices in India therefore below is the formula i.e., all the cost

components associated with petrol & diesel prices for 2016.

Internationally nowadays, the basic price of crude oil which is also called as barrel cost is around

USD 30.5 - 32 (for calculation purpose we will take USD 31.510 per barrel11 as basic price of crude oil

and the exchange rate at Rs. 68.812 / USD)

Thus, cost associated with the import of crude oil = Barrel Cost + Ocean Freight (i.e., USD 2 per

barrel) = 33.5$ per barrel. This import cost is equivalent to Rs. 2,300 in terms of INR.

The cost of raw crude oil in terms of Indian rupee: Rs. 2,300 / 159 = Rs 14.46.36 per litre approx.

Table 2: Calculation Chart for Petrol & Diesel Prices in New Delhi as on 29th February 2016

HeadingsCalculation of Petrol Price *

Calculation of Diesel Price **

International price of raw crude Oil (i.e., Barrel Cost + Ocean Freight ) as on 1st January 2016)

33.5$ or Rs 2,300 per Barrel

33.5$ or Rs 2,300 per Barrel

Therefore cost of raw crude oil per litre Rs 14.46 per litre Rs 14.46 per litre

Calculation of basic operation & maintenance cost (OMC)

Entry Tax (if appl.), processing cost in refinery, margin & landing cost from refinery to OMC - (Refinery Costs)

Rs 3.72 per Litre Rs 3.48 per Litre

OMC Margin, Transportation & Freight cost, Landing cost from refinery to dealers

Rs 2.70 per Litre Rs 2.40 per Litre

Basic Cost of Fuel after Refining Cost Rs 20.87 per Litre Rs 20.34 per Litre

Additional: Excise Duty as on 29th Feb 2016 (hiked further by 75paise on Petrol and Rs 2 / Litre on Diesel)

Rs 21.48 / Litre on Petrol

Rs 17.33 / Lit on Diesel

Pricing Charged to Dealers before VAT Rs 42.35 per Litre Rs 37.67 per Litre

Calculation of Dealer Retail Price (Location – Delhi)

Commission to Petrol Pump Dealers Rs 2.22 per Litre Rs 1.43 per Litre

Fuel Cost Before VAT (rounded off for approximation)

Rs 44.57 per Litre Rs 39.1 per Litre

10 Round off price of crude oil taken from http://ppac.org.in/WriteReadData/userfiles/file/PP_8_a_PS_oil_prices(C).pdf for calculation purpose11 1 barrel = 159 Liters12 Value of 1USD = 68.80 INR taken from xe.com as on 29th February 2016

Additional: VAT (Varies from State to State - 27% on Petrol & 18% on Diesel + 25p as Pollution Cess with Surcharge)

Rs 12.03 / Lit on Petrol

Rs 7.33 on Diesel

Final Retail Price as on 1st March 2016 (As per calculation)

Rs. 56.60 per litre Rs 46.43 per litre

* - Prices as on 1st March 2016There is no such word like Ideal World exits in the dictionary otherwise we would be paying a price of less than Rs 30 per litre for Petrol and Diesel. But sadly, we pay around 61% and 58.4% of the price of Petrol and Diesel to companies, dealers, Central and State Government i.e., more than 50% as Taxes than the cost of obtaining fuel

Taxation Scenario on Petrol and Diesel Fuel

Do you know that we Indian are paying more than 50% of the price of petrol and diesel as taxes i.e.,

Excise duty and VAT. These two components plays a vital role in determining the fuel cost what we

pay at retailers. Thus, despite steep fall in the international crude oil costs, the retail price of petrol

and diesel Prices in India are way higher even some of the most economically expensive countries like

USA, Russia, China, Srilanka, Pakistan etc.

Below is the comparison between taxes I.e., Excise duty and VAT liable on petrol and diesel in

India in November 2014 and March 2016 which has increased significantly in last 15 months.

Table 3: Comparison of taxes on Petrol & Diesel Prices in the year 2014 Vs. 2016

Headings Tax in November 2014 Tax in March 2016 Increase in

Percentage

Excise  Duty on Petrol Rs 9.20 per Litre Rs 21.48 per Litre 200% +

Excise  Duty on Diesel Rs 3.46 per Litre Rs 17.33 per Litre 500%+

VAT on Basic Price on Petrol 20% on Basic Price 27% on Basic Price 35%

VAT on Basic Price on Diesel 12.5% on Basic Price 18% on Diesel + 25p

Cess 44%

In 2015, we had experienced Multiple Hikes in the value of Excise duty and VAT i.e., Excise duty for petrol increased by 200% in the year 2016 in comparison to the value in 2014 whereas VAT increased by 500%

during the same period. This additional amount of money coming-in in the form of Excise duty goes to Central Government.

In 2014, VAT on Gross Price (i.e., base Price + Excise Duty) * (@ 27% on Petrol, 18% on Diesel + 25p Cess) comes to around Rs. 12.76 on Petrol, Rs 7.03 for Diesel. And, this additional percentage of VAT i.e., 35% and 44% on petrol and diesel respectively results in additional amount of money coming-in in the form of tax goes to State Government.

Component Breakup of fuel prices in India (2016)

1. Cost of raw crude oil – Approx. 26%2. Refining cost – Approx. 11 – 13%3. Dealers commission – Approx. 3 – 4%4. Taxes i.e., Excise duty and VAT – Approxi. 55 – 60%

Who is benefitting from falling prices of crude oil?

From falling crude oil prices in the global market, central government and state government are

mainly benefitting from this scenario. Below are some of the facts:

1. In the FY 2014 – 15, government has earned around 78,545 crores due to increase in excise duty on

petrol and diesel as compared to Rs 54,007 crores collected as excise duty in the previous financial

year. Below figure13,14 shows excise duty hikes from November 2014 to January 2016

Source: http://www.abplive.in , http://thewire.in

Figure 6: Revenue earned by the government through successive excise duty hike on petrol and diesel.

13 http://thewire.in/2016/02/06/why-the-75-drop-in-global-oil-prices-isnt-reaching-you-20964/14 http://www.abplive.in/india-news/why-india-increased-duties-on-fuels-as-crude-prices-are-falling-261273

2. In last 1.8 years, the price of crude oil decreased by 70 % thus in last 1.5 years government’s earnings

from petrol and diesel has increased by 101% and 200% respectively

3. Government collects over Rs.2 Lakh Crore per years as taxes from oil companies. So, if the price of

petrol and diesel decreases thus, there will be steep reduction in the annual tax revenue collection from

oil companies

4. Additional it is estimated that the government will earn around Rs 208,336 crore and Rs 229,809 crore

for customs and excise duties respectively for FY 2015-16, including income from petroleum products.

Below is the figure15 showing revenue earned by the government through successive excise duty hike on

petrol and diesel.

15 http://www.abplive.in/india-news/why-india-increased-duties-on-fuels-as-crude-prices-are-falling-261273