Crude Reality Hits India

26 02 2011

In the US, where gas prices are completely deregulated, when international crude oil prices go up, the gas prices at the stations also go up. Although it is not immediate and not exact and there are also local and company level variations. A look at the graph of prices in the US for the last 3 years indicate this. In July 2008, when the crude prices touched a high of US $ 147 per barrel the Gas price at the stations peaked at US $ 4.12 per gallon. ( 1 gallon = 3.78 litres). In Dec 2008, the crude oil prices came down to US $ 32 per gallon, the gas price at the stations also came down to 1.61 $ per gallon. When the crude climbed back again in May 2009 to nearly 70 $ per barrel, the gas price at the stations climbed upto 2.5 $ per gallon. Now that the crude prices have climbed up again to over 100 $ per barrel, the gas prices at the stations is nearly 3.5 $ per gallon. One analyst on BBC mentioned that the rule of thumb in the US is for every increase of 10 $ in the price of crude over a 3-6 months period, the gas prices at the station increases by 25 cents per gallon.
In India, where the petroleum prices are still largely under government control it is difficult to come up with such a thumb rule. Also, the crude oil cost is only about 45 % of the petroleum price at the petrol pump. Rest being made up of other costs.
If the price of petrol stands at Rs 58.90, the break up of cost as calculated by the Indian Government is as follows:
• Basic Price: Rs 28.93
• Education Tax: Rs 0.43
• Dealer commission: Rs 1.05
• Excise duty: Rs 14.35
• VAT: Rs 5.5
• Petrol Custom: Rs 1.54
• Crude Oil Custom duty: Rs 1.1
• Transportation Charge: Rs 6.00
• Total price: Rs 58.90
Yet, India imports 80 % of our oil requirements. So when the crude oil price increases the price increase has to be passed on to the consumer/ taxpayer sooner or later.
Business Standard reports that
The Indian crude basket averaged around $99.85 per barrel in February so far, a rise of over 6 per cent, compared with January’s average of $93.87. The current quarter average, at $96.43, rose 13 per cent, from $85.06 in the previous quarter. The current year’s average price stands at $82.07 per barrel, up over 17 per cent from last financial year’s average of $69.76.
In January 2011, there was a price increase of Rs 2.50 to Rs 2.54 per litre of petrol. ( 4.5 %). This was over and above the price increase of Rs 2.5 (5.5%) in December. The average price of India crude oil basket in the quarter ending September 2010 was 76.22 $ per barrel. So when the crude oil prices increased by 8.28 $ per barrel between the Sept and December quarter, petrol prices were increased by Rs 5 in December and January.
So we can say that the thumb rule for India would be about Rs 6 increase in the petrol prices at the station for every 10 $ increase in the price of crude oil. So as the average price of Indian crude basket in this quarter is already 96.43 $, an increase of over 11 $ from the previous quarter, if the Indian government and Oil Marketing companies decide to act, be prepared to face an increase of Rs 7- 8 per litre of petrol at the station.
– G. Mohan




One response

8 04 2011
Gayatri Prabhakar

Dear writer,

Indeed a very enlightening article. Esp. the calculation on the pricing mechanism adopted by the Indian government. I was hoping if you could also share information on the source of calculation, particulary the transportation tariff mentioned in the article.

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