ARTICLE ON CRUDE OIL

Have you ever thought about precisely why there is a huge disparity in vehicular fuel prices across the world and within India? Did you know Iran sells Petrol for Rs.7.7/litre while Norway sells gasoline for Rs.175/-? The reason is a combination of factors: Dissimilar tax structures; Proximity to Middle East countries; Number of Oil-wells and Refineries etc. Within India, Maharashtra sells Petrol for Rs.78 while Goa for just Rs.58. Since 2012, there is negligible price difference between Diesel and Petrol in Goa because the Manohar Parrikar led Govt. slashed VAT to 0.1% as part of the poll manifesto.
India imports about 80% of its crude oil from Middle East countries like Iran and Iraq and that too in Dollars, which is the universal currency for Oil-trading across the world. Unfortunately, no white paper has ever been published to educate us about the actual cost break-up of crude oil calculations. So, we have to figure it out ourselves. Let’s begin.

  1. Current price of Brent Crude Oil = $107/barrel and $1=Rs.63/- as on Nov’13
  2.  India purchases 1 Barrel (=159 litres) of Crude Oil @ $107 =Rs.6741/-
  3.  India purchases 1 litre of Crude Oil @ 6741/159 = Rs.42.4/-

The processing cost of Crude Oil in the refineries is Rs.6/litre. This includes the transportation cost also. Till this point, the cost of both Diesel & Petrol is exactly the same. But, in Rajasthan, for instance, the Oil Marketing Companies (IOC, BPCL, HPCL) sell Diesel & Petrol at Rs.55.5 & Rs.74.5 at their retail outlets. The commission paid to dealers is Rs.0.9 for Diesel & Rs.1.5 for Petrol. So, the total cost (before applying taxes) to the Oil Marketing PSU’s for Diesel & Petrol are Rs.43.3 & Rs.43.9/- respectively.

For Petrol, the price difference per litre is a whopping Rs.32.1/- which is paid by consumers in the form of various taxes (State VAT, Central Excise, Education Cess etc.) to the Government. Excise and Education Cess are fixed components while VAT and Dealer commission are variable components. VAT is different for different states. In Delhi, for example, its 20% while in Rajasthan its 28%. Excise duty is Rs.14/- per litre for Petrol and Education Cess is Rs.0.50/- per litre. This leaves the Government with a tax amount of more than 70% of the original cost of acquiring and processing raw crude oil. It’s more than what our neighbouring countries like Sri Lanka and Bangladesh charges its citizens.
Diesel, on the other hand is heavily subsidized by the Indian Government in order to woo the voters of a predominantly Diesel-consuming agrarian economy. However, this isn’t entirely the fault of the Government. Roughly 64% of gross revenues in the form of taxes for both Central and State Governments come from the Petroleum industry. Reduction of taxes would have an ill-effect on an already increasing fiscal deficit. So, it’s not an option. In my opinion, what it should do is to invite international bids for Oil exploration and production, like it did in the year 1979 and make the whole process unconditionally transparent this time. This move will encourage competition in the refining industry & will force the Govt. to sell Diesel and Petrol at reasonable prices and at the same time also increase its revenues. It’s a win-win situation. Like any other product, there has to be an end to this monopoly if we want fuel prices to be cheaper.
On a lighter note, I would say the situation is not as grim as it sounds. Because if you compare Petrol price with the price of some other liquids that we use almost daily, you’ll get the whole picture.  Price of Petrol: Rs.75/litre; Price of Coke: Rs.70/litre; Price of After-shave lotion: Rs.1800/litre; Price of Pure almond oil: Rs.2800/litre and the most outrageous – Price of Printer ink: Rs.91000/litre. So I am glad my car doesn’t run on Coke or After-shave lotion or God forbid Printer Ink!

 

Author:

  Pranshu Awasthi, IBS Gurgaon, Class of 2007

  You can reach him at: pranshumba@gmail.com