Petroleum price mythology

The following has been reproduced from the article "Is petroleum pricing all gas?"
by S. Pushpavanam in Economic Times dated Sept 6, 2010
http://economictimes.indiatimes.com/articleshow/6503804.cms


The Organization of the Petroleum Exporting Countries (Opec) claims on its website that it sold crude oil (2004-08) worth $3,346 billion to G-7 countries, but G-7 countries got $3,418 billion by way of taxes on the price.

Opec says the real villains are the governments that use petrol as a means of taxation. UAE, Mexico and the US are at the low end of the scale that indicates taxes on petrol, with India, UK and Germany at the high end.

In India, nearly 50% of the price per litre of petrol goes to the government, but the pricing is not transparent and has notional and unreal elements. Several myths in the petroleum pricing need to be broken.

We are told that kerosene and LPG are subsidised. Let me illustrate. A grocer can sell chillies at 80% profit, sugar at 50% profit and, in order to capture the market, he may sell salt at cost price or less.

When he makes a huge profit on the whole, does individual pricing matter? This can be called differential pricing, a pricing strategy or price manipulation, but never subsidy or cross-subsidy.

A clear example of subsidy is public distribution system. The gap (. 12-50) between actual cost and the selling price is provided by central and state governments so that the poor can afford to buy the rice. In petroleum products, there is no subsidy because of the overall profit.

The government does not give anything and we pay more taxes than the notional subsidy.

The ninth report of the Standing Committee on Petroleum Products (page 23) says, “We have to take care that these subsidies are also recovered out of the overall sales which we make so that there is no impact on the Budget.

There is no drawal from the exchequer.” Language is used to hide meanings. You must have heard subsidy being given or received: ONGC pays out subsidy.

ONGC chairman R S Sharma’s statement on July 30 states that they have paid out fuel subsidy worth . 5,515 crore in April-June quarter to oil marketing companies. What he means — but does not want us to understand — is that instead of selling crude oil at . X, they should have sold crude oil at . X+.

But when they have made a profit of . 3,661 crore even for one quarter, how could anyone call this a subsidy? A deception of great magnitude is being practised by the bureaucrats of the oil industry and oil ministry. In fact, in 2009-10, we contributed . 1,83,861 crore to central and state exchequer through taxes and duties via the oil sector.

Crude suffers octroi, then cess at . 2,500 per metric tonne, sales tax, education cess, port charges and Customs duty of 35%, and refined petrol attracts 30% sales tax in Tamil Nadu, 7.5% Customs duty, central excise and central sales tax. The cess collected so far since 1991-92, . 84,337 crore, was meant for Oil Industry Development Board (OIDB), but only .

902 crore has been given to OIDB. This shows that deregulation will not push the prices down as it can impact only part of the cost.

It is the oil companies that luxuriate on high petrol prices. ONGC has a profit of . 16,767 crore (26.8% on net sales of . 64,276 crore), Indian Oil Corp (IOC) . 10,220 crore (4.11% on . 2,49,271 crore), Hindustan Petroleum Corp (HPCL) . 1,301 crore (1.2% on . 1,07,637 crore), Bharat Petroleum Corp (BPCL) . 1,837 crore (1.5% on . 1,22,275 crore) and Oil India . 2,610 crore (32.33% on . 7,905 crore) — their total profit being . 32,735 crore in 2009-10.

It is clear from their sales volume that IOC, BPCL and HPCL should have made at least five times more profit but haven’t. Because they have spent it on themselves lavishly. The salaries are scandalous:

According to IOC financial reports, a casual labourer who joined 15 years ago is paid . 8,39,757 per annum! Some drivers with M.Com degrees are paid . 22 lakh per annum. A V-standard caretaker gets . 8,56,731. Officers above these levels are paid a minimum of . 24 lakh per annum.

The 56-year-old senior attendant (VIIIth standard), Prakash Paswan, who joined on March 6, 1976, today gets . 45,99,234 (Rupees forty-five lakh, ninety-nine thousand, two hundred and thirty-four only)! This will suffice. This is how the huge profits — all our money — are spent.

Another myth is the concept of under-recovery. The cost of domestic crude is equated to the imported price of crude oil. When this is not fully recovered from the consumer — due to administered price — the difference between cost of Indian production and cost of imported crude is called under-recovery.

This is applied to refining cost, freight and delivery charges. This totally notional and unreal amount is paraded as loss. The Chaturvedi Committee report on this is yet to be made public.

There is another dark area: while drilling, natural gas springs out free. Crude refining produces LPG, motor spirit (petrol), naphtha: kerosene, aviation turbine fuel, high-speed diesel oil and low diesel oil.

Then finally: furnace oil, lubricant oil, bitumen, petroleum coke, paraffin wax and other waxes. Is the total refining cost added to each petroleum product arbitrarily or is it proportionately apportioned to each derivative? This must be explored.

What is urgently needed is a non-governmental committee of cost accountants and technical persons from oil industry to analyse thoroughly the costing and come out with recommendations for honest and transparent pricing, and with suggestions to cut costs. A lower petrol, diesel and LPG price will boost the economy, ensure savings for the consumer, and ultimately help the nation.