By Rajesh Pandathil & Kishor Kadam
There is a nagging suspicion among the public that they are not getting the full benefit of the crude price decline. A look at the numbers tells us it may indeed be true.
The price of the Indian basket of crude oil averged at $30.53 per barrel in February 2016. The last time the price hit $30 was in January 2004. In February 2016, the prices of petrol stood at Rs 59-66.05 per litre across four metros in the country while that of diesel stood at Rs 44-52 per litre.
However, in January 2004, the petrol were priced in the range of Rs 33.7-38.83 per litre and diesel in Rs 21.73-27.43 per litre range. In short, though the current crude oil prices are roughly at the January 2004 level, the prices for petrol and diesel that we pay now are double the prices we paid then. So, there is indeed reason to think that the consumers are being short-changed by the government and oil companies.
But the fact is this is true for not only for India but across the Asian emerging markets.
"The reduction in petrol and diesel prices in the capital cities of Asia’s 12 biggest consumer countries that we tracked between September 2014 and February 2016 falls way short of the slide in crude as measured by the average of benchmark Brent and Dubai prices over the same period," said Vandana Hari, Asia editorial director at Platts, a provider of information on commodity and energy markets globally.
According to her, this explains why demand growth in emerging Asia, though robust, has not been as spectacular as one might have expected considering the sharp fall in the crude oil prices.
So, why are the consumers not getting the benefit of the nosediving crude oil prices as much as they should have?
In the Indian context, there are four key reasons:
Fuel prices are not subsidised any more: Petrol prices were deregulated on 26 June 2010. This essentially means that the market determines the prices of the fuel. Back in 2004, the prices of petrol were tightly administered by the government.
Accordingly, the petrol under-recoveries - loss on account of selling petrol below the market prices - of oil marketing companies stood at Rs 2,723 crore in 2005-06. Meanwhile, the diesel under-recoveries stood at a much higher Rs 12,647 crore. The UPA government started diesel deregulation in 2010 and the NDA government completed the process on 19 October 2014. With the subsidies gone, consumers are forced to pay the market prices for the fuels.
Rupee is depreciating against the dollar: The rupee is currently ruling around 67 against the dollar. In 2004, the rupee was at a stronger 45. A depreciating rupee increases the cost of imported goods. So this will impact the landed price of crude oil in India.
As Hari explains, "This (the depreciation of currencies) essentially erodes the buying power of the countries’ refiners, who pay for their feedstock crude in US dollars and earn their revenues from refined product sales in the local currencies."
Companies are keeping margins for themselves: With the fall in crude oil prices, companies are enjoying better margins and they are keeping them. According to Hari, 2015 was a good year for refining margins in Asia.
"Singapore Dubai cracking margin (GRM) as measured by Platts-Turner Mason data averaged just over $5/barrel in 2015, more than double the levels seen in 2014. The margin denotes refiners’ profits measured as the difference between their crude input costs and their refined products sales prices. What that means is that refiners partook some of the advantage of cheaper crude," she says.
Marketing/ retailing margins seem to have improved too. "This suggests that companies in the fuel distribution chain between the refinery gate and the gas stations also grabbed some of the benefits of the decline in crude," she says.
Government is making some quick bucks from excise: The government has been increasing the excise on petrol and diesel. From April 2014 to March 2016, the prices of crude oil have fallen 64 percent. During the period, excise on petrol went up by 126.6 percent from Rs 9.48 per litre to Rs 21.48 per litre. On diesel, the increase has been a humongous 386.8 percent from Rs 3.56 per litre to Rs 17.33.
During the period petrol prices across the four metros fell 18-22 percent and those of diesel 13-17.4 percent. Right from 2012-13, the government's tax/ duties collection (of which excise forms a major chunk) from the petroleum sector has been rising steadily.
As per the data from Petroleum Planning and Analysis Cell, the government's revenue on this count stood at Rs 100,339 crore in 2012-13. This rose to Rs 106,090 crore in the next fiscal and then jumped to Rs 126,219 crore in 2014-15. In 2015-16 first half, the government has already garnered Rs 85,914 crore.
The increase has come mostly on account of the increase in excise. In the the current year first half, the government has collected Rs 70,494 crore as excise from the petroleum sector. This is very near the corresponding figure for the entire 2012-13, when the excise collection stood at Rs 73,310 crore. Clearly, the government's move is mostly offsetting the decline in crude oil prices.
There is a view among experts that the government and the companies should have passed on the full benefit of the crude price fall to the consumer. This would have helped increase consumption demand and also pulled down inflation a little steeper, they say.
However, as a cash-strapped government desperately looks for ways to increase its tax revenue, it will find some or other excuse to increase the excise on the fuels.
Also, with the rupee likely to depreciate further should the US Fed raises rates again, consumers are unlikely to see any steeper fall in their fuel bills even if the crude prices decline more.