Oil cartel’s hand in high petrol prices

Oil cartel’s hand in high petrol prices
Ashwini Mahajan | September 22, 2017

In the last few days, steep hike in the prices of petrol and diesel is creating doubts about the legitimacy of recently introduced pricing mechanism for these products. It is notable that prior to June 2010, prices of petrol, diesel, LPG, Kerosene etc. were all determined and controlled by governments.

Under this administered price mechanism, upheavals in international crude prices did not affect domestic prices on a day-to-day basis. Further, it is notable that for the most part drilling, refining and marketing of petro products has been in the hands of public sector giants like ONGC, Indian Oil, Bharat Petroleum etc., though some private companies like Reliance have also entered this field in recent years. After June 2010, government left the pricing of petrol, diesel etc. on petroleum companies.

After the decision of the government to decontrol prices, these started changing very frequently. This led to instability in retail petro prices. After 1 May 2017, government allowed daily fixation of prices on experimental basis in five cities and the same was extended to the whole country later. It is notable that before this, petrol and diesel prices were announced on 1st and 16th of every month. In the first month, prices of petrol and diesel declined slightly; however, in later months there was a steep hike.

The reason for questioning the pricing mechanism is evident. In May 2014 international price of crude oil was $107 per barrel and the price of petrol in Delhi was Rs.71.47 per litre. Now 2017, when the price of crude is only $54 per barrel, the price of petrol in Delhi is still Rs.70.39 per litre.

The benefit of low international price of crude oil has not been passed on to consumers. The general perception is that by allowing companies to change the price daily, government has given them the right to exploit consumers. People feel that central and state governments and petroleum companies are exploiting them.

Ashwani Mahajan

The Petroleum Minister, Dharmendra Pradhan believes the new price mechanism is transparent and that there is no mistake. According to the minister, increase in petrol and diesel prices is due to increase in crude prices, which is obviously short lived. He has also ruled out any possibility of re-imposition of price control.

It is true that recently there has been some increase in international crude prices, due to which petroleum companies have hiked prices of petrol and diesel. To that extent, the minister is right. However, if a comparison is made between 2014 and 2017, nobody would be able to justify the current prices.

After May 2014, nation benefitted hugely due to steep fall in crude prices. Government used its prerogative to divide this benefit into three parts. First part was transferred to governments (both at the Centre and states); second was granted to petroleum companies and they were allowed to raise their profits and only a small fraction was transferred to consumers.

If we look at central and state governments’ revenue we find that it increased three times between 2013-14 and 2016-17, to 5.24 lakh crore. Profits of three petroleum companies, namely Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum; increased by 66 per cent in 2015-16 and 160 per cent in 2016-17. However, if we look at the consumer’s perspective, price of petrol came down from Rs.71.40 (in Delhi) to Rs.56.61 per litre in March 2016, before it started to rise and reached Rs.70.4 this month. Data shows that in May 2014 only 33 per cent of petrol price went into taxes and dealer commission, but now it has reached 58 per cent.

In case of diesel, taxes and dealer commission was 20 per cent of the price, it has reached nearly 50 per cent now. It is inescapable therefore that decline in international crude prices has given huge bonanza to the central and state governments and also to the petroleum companies. However, the government has been miserly in passing on the benefit to consumers. It appears that petroleum companies are not ready to reduce their profits.

New mechanism to determine oil prices has given them a weapon to exploit consumers. In fact, the new system to determine petrol and diesel prices does not benefit consumers, industry and agriculture. Daily changes in price are becoming the cause of instability. Those who advocate daily changes in prices argue that international crude prices change daily, therefore it is legitimate to change prices daily.

However, this argument may not hold good for India, as deals for purchase of oil by large companies are made well in advance and daily changes in oil prices do not affect them. If it is argued that this happens even in America and Europe, it will not hold water, as oil prices there are decided based on competition and each company decides its own price.

In India, they are decided by an industry cartel. Therefore, these companies can keep prices high at their will.

(The writer is Associate Professor, PGDAV College, University of Delhi)