Control over petroleum product pricing is not special to India. But, the mechanism under which pricing is done has become a cause of concern for all stakeholders, particularly the consumers.
A random look at petrol pricing in India, China, Russia and Pakistan shows that while the prices in India and China are quite similar, in Pakistan and Russia they are cheaper by about Rs 12/litre and Rs 20/litre, respectively.
Despite a sustained rise in crude oil prices, the Government restricts the public sector oil marketing companies (OMCs) from raising retail prices.
Diesel prices were last revised in June 2011, along with kerosene and LPG. Though the Government deregulated petrol prices in June 2010, an informal control continues.
Non-revision of prices of these fuels since then has severely impacted the liquidity and profitability of OMCs and has inflated the Government’s subsidy burden, say both public and private sector players.
Dilip Khanna, Partner, Oil and Gas practice, Ernst & Young, said the scheme of subsidies all along the petrol and diesel chain has made the business of oil marketing unattractive.
China, in 2009, adopted an oil pricing mechanism that allows the economic planning agency to adjust retail fuel prices when world crude oil prices change by more than four per cent over 22 consecutive working days. This policy is set by the Government to limit the upper price of oil products and to neutralise the impact of a sudden fluctuation of international oil price on the market.
It, however, compensates its two largest oil companies Sinopec and PetroChina on its refining losses. Chinese refiners have been reporting wide refining losses because of State-capped pump rates, say those involved with the sector.
Russia’s petroleum marketing sector has an oligopolistic structure, industry observers say. Despite the fact that there are many competitors in the market, oil prices are set by select companies. There is no subsidy mechanism.
According to latest information available, former Russian Deputy Prime Minister Igor Sechin has founded the “oil club”, which brings together top executives of major Russian oil companies and with whom he plans to meet regularly to discuss their business status.
In Pakistan, the prices of petroleum products include internal freight, oil marketing companies fixed margin, dealer margin, petroleum levy and general sales tax (GST).
Currency Fluctuation
The prices of these products are published in Platts in US dollars. The extent to which currency fluctuations affect the petrol/diesel pricing then depends on local currency depreciation/appreciation versus dollar. Any depreciation will increase the domestic prices of these products and vice-versa.
China has managed currency fluctuations on petrol/diesel pricing by a floating exchange rate policy. So, currency fluctuations have been minimal, depending on the extent of the central bank’s intervention in managing the yuan with respect to the US dollar.
In Russia, the prices nominated in dollars are translated into rouble at average dollar/rouble exchange rate for the respective period. Difference between movement of prices denominated in dollar and those denominated in roubles is explained by the nominal rouble appreciation against dollar.