Right pricing petrol & diesel - The Hindu

Wednesday, October 7, 2015

3:52 AM

Oil companies should price their products according to their

own cost structures
short-lived experiment in 2002 when petrol and diesel prices were freed
for a short period
Deregulationoil companies will have the freedom to manage retail price of diesel on
their own and adjust it at periodic intervals to reflect market levels.

Oil companies refine crude oil to produce diesel (and other products such
as petrol, cooking gas and kerosene) in their own refineries in India. They
have not been importing diesel or petrol for a decade now, thanks to a
sharp increase in domestic refining capacity.
Given this, why should the landed cost of imports, which includes items
such as freight, insurance, handling charges and, of course, customs duty,
be considered for fixing domestic retail price? This is the unfair part
about under-recoveries, a word that is often cleverly used
interchangeably with losses.
But why do oil companies harp on under-recoveries and demand that
domestic price should be linked to that? Simply because the landed cost,
which includes duties and other levies, offers them protection to cover
up possible inefficiencies in their operations. This protection is
unnecessary and unfair to domestic consumers and all it does is promote
inefficiency. It is no secret that the public sector oil companies are
saddled with high costs for reasons ranging from excess staff to
duplication of facilities between them. By linking retail price to underrecovery all that the government does is ensure that such inefficiencies
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For reform of the oil sector

- transparency and reform of the methods
followed by the oil companies while setting
fuel prices, whether petrol and diesel or
cooking gas and kerosene
- The concept of under-recovery has to be
jettisoned
- competition between the different
players public and private needs to be
encouraged
That alone will allow proper price discovery for
these economically sensitive fuels

recovery all that the government does is ensure that such inefficiencies
are passed on to consumers. Again, global prices of crude oil and refined
fuels such as petrol and diesel do not always move in tandem. The forces
that drive their respective markets are different. For instance, the
international market price of petrol and diesel can spike if there is a
refinery outage somewhere in the world causing supply disruption. There
have been instances in the past when refined fuel prices have surged due
to a fire or a maintenance shutdown by a particular refinery. Crude oil
prices are not affected by such factors. By taking into account landed cost
of refined fuels rather than crude oil, the oil companies may be forcing
consumers to pay a higher price when there is really no supply problem
within the country.
Cost-plus pricing
The ideal way to go is for oil companies to price their products
according to their own cost structures. Each company has a unique cost
structure which is a factor of its refining efficiency. The final market
price should be discovered on the basis of the cost of crude plus refining
costs and the margin of the oil company.
This can happen only in a competitive environment where the oil
companies compete with each other and against the three private
players Reliance Industries, Essar and Shell. As of now , the PSUs
operate as a cartel when pricing their products, which is an anticompetition practice. Clearly, the next item on the agenda for the
government should be to push the oil companies truly into the market
era where fuel prices are linked to efficiencies and vary not just between
the different players but between petrol stations of the same player
based on which one is more efficient. That will be real reform.

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