Another fuel price hike is imminent within a couple of days. While I had always argued for de-regulation of retail fuel prices, I recently came across some interesting information on oil price dynamics in India.
I always assumed that fuel prices are artificially low in India. Let us test this hypothesis. The US (where gasoline ie petrol prices are market driven) retails petrol for $3.6 - 4 per gallon. One gallon = 4.5 liters and 1$ = Rs 42.6. Doing the math, we get Rs. 34 - 37 per liter of petrol. In Delhi (which I believe has the lowest fuel price in India), it retails for Rs 43 / liter. So how can it be under-priced??
The interesting answer is that petrol is underpriced in India from the point of view of oil-marketing companies only, not from the end-consumer point of view. And the guy who keeps all the cream is (no surprises here!) the Government of India.
Here is how it works (all numbers for example only) - petrol price (at international prices): Rs 100. Landed cost in India: Rs 105 (price at which the oil cos refine / buy the stuff). Taxes paid by oil companies (like IOC, HPCL and BPCL) to the Govt (incl. excise, customs and sales taxes): Rs 40. So oil companies' cost: Rs 145. Retailing price: Rs 120. Loss to oil co: Rs 25. Loss to consumer: Rs 15. Gain to big brother GoI: Rs 40.
GoI is a well meaning guy. He wants to make sure that he gets votes. So he takes this Rs 40, and distributes it as largesse to various deserving sections. The only hitch - his agents (the political honchos and bureaucrats - guys in charge of making sure it reaches the right people) - keep Rs 39.5 out of this Rs 40. So they can stash it under their mattresses / maintain their multiple mistresses / send their kids abroad etc etc.
Nice scheme.
Also another reason why oil prices in India will never be de-regulated (at least not while the Congress and their brethren in bed the Communists are in power). Hopefully this will change one day!
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8 comments:
Dost,
Thanks for this piece. I was curious to learn the oil maths but too lazy to make the effort.
One question though. The US govt. must be taxing the Oil companies too. So the 37 Rs./litre US retail price would be landed cost + govt. tax. Which would imply that procurement price for US is much lower ?
So, apart from the corruption part, the Govt. is behaving in its natural tax greedy way, isn't it ?
Pls. do respond :)
Megha,
That is right. The US govt. taxes oil nominally (rightly, it taxes the oil companies on their profits as normal income tax).
The GoI, on the other hand, derives 15-20% of its tax revenue (or a massive 1.6% of GDP) from excise / customs / sales taxes on oil. This is even before charging another hefty slab of income tax from profits of the oil cos. The problem is that this 1.6% of GDP does not reach its intended beneficiaries since there is so much 'leakage' (read corruption) in the subsidy delivery system in our country.
Cheers,
2 points:
1 Gallon = 3.78 Litres not 4.5 as mentioned in the blog. that makes Us equivalent to Rs 45 per litre.
2nd Point- You have ignored the higher efficiency US oil refineries have both in refining and transportation and also US domestic production contribution is higher as compared to india.
However, even with these corrections the logic may hold good but the difference will not be so dramatic.
agree with point #1. i had googled for the conversion ratio and on checking it again, i see that 1 UK gallon = 4.55 litres.
on point #2, i think indian refineries have higher nelson complexities and better efficiencies (at least am sure for the reliance refining facility). agree on lower transport costs in the us though.
yeh uk and us ke log agree kyun nahi kar sakte on their measuring metrics??
Surprisingly the level of taxes on oil are not unique to India. Recently a bunch of truckers protested in London over the high level of government taxes on oil. The figure turns out to be a hefty 50% or thereabouts, i.e. 50p of taxes on £1 of oil. The figure in India I think is closer to 100%. A legacy of the Raj I guess.
The prices in Europe are in the range of US$ 9-10 per gallon which are significantly higher than that in India.
In most countries of the world, oil production is taxed heavily e.g., 70% tax in Norway. Oil continues to be one of the main revenue earners for most governments so it is hard for them not to tax it.
US is an exception as that also provides huge oil subsidies. This is the legacy of promoting automobile growth in the country which makes it today the largest consumer of petroleum products. There is a lot of debate within US regarding the subsidies it provides to its oil companies as that is a big drain on its budget. Oil subsidies in US are estimated to be in the range of US$ 20-30 bn a year
While on oil prices, couple of years back when prices were in range of 35-40 for Petrol was doing a project for a Philippines Oil company. Philippines doesn't produce a drop of oil, it is completelt dependent on imports, the transportation costs are higher if you consider that the country is made up of 7000 islands. Yet the price over there as in range 30-32 INR. One of the reasons was free market, the prices were de regulated and Shell, Caltex and Petron had an intense rivalry going which brought in operational efficiencies.
Read this article in rediff on oil prices:
http://www.rediff.com/money/2008/jun/02mrv.htm
Not sure how much of this is conspiracy theory, but at some level I feel that derivative trading in commodities have been impacting the prices adversely without the benefits reaching the producers. May be the financial analysts can give a better perspective.
I would also like to add another aspect here. Since the prices are regulated, it also impacts the demand curve thus fuelling the increase in crude prices.
Also read an article on Rediff, the price of petrol in Venezuela is equivalent to Rs 2.12 per litre.. Wow what a place to own an automobile
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