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Oil price history explained

Oil Price Explained

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)

Tamil Nadu govt hikes bus fares by 20 to 54 percent

Protests Continue Against Bus Fare Hike In Tamil Nadu

Tamil Nadu govt hikes bus fares by 20 to 54 percent, says move inevitable on account of 'rising fuel prices'

India PTI Jan 20, 2018 13:43:21 IST

Chennai: After a hiatus of six years, Tamil Nadu government on Friday hiked the fares of buses under state run transport corporations and private entities approximately by 20 to 54.54 percent, saying it was inevitable.

Significantly, the government also announced a fund for accident compensation and prevention, besides a panel to go into restructuring of bus fares in future.

Effective from tomorrow, the fare has been hiked for buses across categories viz moffusil, city, ordinary, express, deluxe, bypass-non-stop, ultra deluxe, air-conditioned and Volvo modes, an official release said.

While the minimum hike is in moffusil ordinary category, where the fare of Rs 5 for 10 km would now be Rs 6 (20 percent hike), the highest is in Volvo buses, where the fare of Rs 33 for 30 km will now go up to Rs 51 (54.54 percent hike).

In town buses the fare has been hiked from a minimum of Rs 3 to Rs 5 and the maximum from Rs 12 to Rs 19.

Representational image. PTI Representational image. PTI

The government cited a host of factors for the hike, including increase in fuel price and maintenance, annual increment in salaries, pension and purchase of new buses to increase efficiency.

Defending the hike, it said the last time fares were increased was on 18 November, 2011 when diesel cost Rs 43.10, whereas the price now was Rs 65.83.

The government also cited data to claim that the fares, despite the increase, was lesser than in neighbouring states, including Andhra Pradesh.

A recent interim direction of the Madras High Court in a transport related petition was also cited to support the decision to effect a hike in fares.

The government quoted the interim order as saying, "data furnished in the supporting affidavit shows that the present bus fare is inadequate to meet,even the operational cost."

The court had also said "with the existing funds and resources, maintenance cost, debt, loss and such other economic factors ...the need to revise bus fare, appears to be inevitable, though it may cause inconvenience."

The government said that since 2000 till date, Karnataka had hiked the fare 16 times, while Andhra Pradesh and Kerala had done so eight times.

In the past seven years, the Tamil Nadu government gave Rs 12,059.17 crore subsidy to State-run transport corporations to help them tackle the fund crunch.

These corporations have so far incurred a recurring loss of Rs 20,488 crore, the government said.

"Though the increase in fare was avoided so far,it is now inevitable so as to tackle the fund cruch and to continue to give the people a good transport service," the release said.

In a significant step, the government said an integrated 'Accident prevention, compensation and toll fee fund' would be set up, under which speed governors would be installed in long distance express buses as part of accident prevention efforts.

Private transport entities will be permitted to establish similar funds.

Unlike neighbouring states, the fare in Tamil Nadu presently does not cover insurance and toll fee components.

Henceforth, the fare will cover an integrated component of accident insurance and toll fee as well, it said.

From a minimum of Rs 1 (upto Rs 25 fare) a maximum of Rs 10 will be levied (for fares above Rs 501) for this purpose.

Defending its decision, the government said since timely compensation for accidents was not provided, as many as 652 State-run transport corporation buses were under court attachment proceedings. Also, the state transport corporations spent an average of Rs 12 crore per month towards toll fee.

A new accident compensation fund will ensure that victims (or their kin in case of death) would be provided compensation ranging between Rs 2.5 to Rs five lakh immediately, it said.

For those injured, it would be between Rs 10,000 to Rs two lakh depending upon the nature of injuries and duration of hospitalisation. For those who suffer permanent disability or head injury, the compensation will be Rs five lakh, it said.

The government said restructuring of fares in future would be done by a committee of senior government officials based on computation involving indices covering fuel price hike,changes in maintenance and repair cost and increment in salaries.

There are eight State run transport corporations in Tamil Nadu with 22,509 buses, employing 1,40,615 personnel.

Workers of Tamil Nadu State Transport Corporation (TNSTC) owing allegiance to 17 trade unions,including those affiliated to DMK and Left parties, had gone strike on January 4 after failure of talks with the government on wage revision.

While unions wanted a 2.57 times hike, the government offered only 2.44, resulting in a stalemate.

The strike severely crippled public sector bus services, causing immense hardship to public, including office-goers in cities though the government tried to maintain services by roping in temporary drivers and private buses.

The AIADMK backed union, besides some others, had not participated in the protests.the unions had called off the strike on 11 January after the Madras High Court appointed an arbitrator to settle their wage dispute with the government.

Published Date: Jan 20, 2018 13:43 PM | Updated Date: Jan 20, 2018 13:43 PM