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Petrol price hike and its effects on our day to day life
Petrol has become an indispensable part of our day-to-day life, and we can’t imagine our life without it. But the petrol prices are sky rocketing, and it is eventually going to affect each and everything that we use in our day to day life. Poor people are already working hard to earn square meal a day and this hike is definitely going to paralyze these already-burdened people. Within three years petrol price has increased 10 times and is still increasing. It is nothing but adding fuel to the fire. Petrol hike directly or indirectly affects all the major sectors like transportation, textiles, auto, FMCG etc, for manufacturing & transportation. This affects the prices of daily essential commodities which are transported on a daily basis. Banking sector is also expected to suffer due to high inflation level.
Increase in fuel price will also increase in food price. This will have a more severe impact on poor people because poor households spend more than half of their income on food and only a tenth on fuel. It is a chain reaction once started will affect all. Increase in petrol price will increase the transportation cost, increase in transportation cost will increase in price of goods, and this increase in price of goods would gradually force the people to loosen their pockets even more, and so on like this, the chain will further propagate. These ups and downs push more people into poverty and leading to a more pathetic situation of those already poor. This has obviously sent shock waves to the common man who is trying hard to make both ends meet. Price hike affects only the low wages or fixed salaried middle class families as compared to higher wages salaried class. The existing middle class is squeezed and many of those striving to attain the middle-class standard find it persistently out of remit will bring no negative impact on government employees as their DAs will be increase accordingly. Rich and corrupted people are least bothered of it. Business class like auto-rickshaw drivers shall transfer the burden to common people so they are also safe. Common people if doing business shall also pass the burden to customers and chain reactions. The community that suffers the most is the common people or “aam aadmi”.
So what are we thinking? For the situation to get worse or are we waiting for such a heroic person who’ll bring us out of this situation. No, we, the people are the one to do something and control the situation. Stop blaming government and think how to solve it. We Indians import oil from different countries. We don’t have enough oil to meet our requirements. So we have to depend on import of oil. If there is increase in international price then we have to bear price hike in India also. Then value of rupee in comparison with dollar is becoming weaker in international market. Increase in number of vehicles also causes hike in petrol prices. So the thing we can do is to reduce oil consumption by using public transport for travelling to routine places like our office, markets etc. Use of high capacity transport system like train, ships instead of trucks and carrier vans. Use of cycles to go to nearby places instead of bikes or cars. Cutting off fuel supply or switching the engine off when traffic is halted for long. Developing alternate sources of energy like solar energy etc. Development of bio-diesel, and government should allocate more funds for developing alternate sources of energy as well as develop high capacity goods and public transport system. At last but not least I want to say petrol is a natural resource and limited in nature. We have to use it judiciously so that our future generations can also use it, and thus lead to sustainable development. As someone has rightly said,
“Natural resources are not something we inherit from our forefathers but something we borrow from our children”
Daily changes in petrol prices since 16th June. What it means for you?
Following a forty-day long pilot which started on 1st May in five cities of Udaipur, Jamshedpur, Vishakhapatnam, Puducherry and Chandigarh, the government rolled out the daily fuel price change regime to the rest of the nation. Beginning 16th June, all petrol pumps across the nation (58,000 in number) have been changing their petrol and diesel prices each day based on international market prices of crude oil and foreign exchange rates. Earlier these prices were changed fortnightly i.e. on the 1st and 16th of each month based on the average price of crude oil and foreign exchange rate of the preceding 15 days.
To better grasp the need for a shift to daily fuel price change model it is essential to first understand the changing dynamics of petrol pricing in India.
Components of Petrol Prices
Crude oil is the major raw material for petrol. At present, 75% of India’s crude oil needs are met through imports. And thus, international prices of crude oil and foreign exchange rates form the base components of price of petrol at home. Ironically, they form only a small portion of the retail price, and the final price is determined by a host of other factors. In fact, more than 57% of the retail petrol price per litre goes towards taxes, duties, cesses and dealer margins.
The following stakeholders are involved in production process of petrol and thus play a crucial role in determination of its retail price-
Oil Production and Exploration Companies
These are the companies responsible for producing oil in its crude form. There is a mix of both private sector companies like Reliance Industries, Cairn India Ltd; and public sector counterparts like Oil India, Oil and Natural Gas Corporation (ONGC) among others in this sector. However, these companies together cater to only 25% of India’s crude oil requirement. The rest of the crude oil is imported.
Oil Marketing Companies
The crude oil is then bought by Oil Marketing Companies (OMCs), which handle oil from its crude stage till the time it is handed to the dealers in its refined form. Thus, OMCs take care of refining of crude oil into petrol and selling the refined petrol to the dealers. This sector also comprises of both public and private companies. However, the three PSUs- Bharat Petroleum Corporation Limited (BPCL), Indian Oil Corporation Limited (IOCL) and Hindustan Private Corporate Limited (HPCL) control around 95% of this sector; while the two private players- Reliance Industries and Essar cater to the remaining market.
Dealers are individuals or businesses that own petrol pumps. They are thus sellers of petrol to end users at retail prices, after adding taxes and their own margins.
The Pricing Structure of Petrol
Crude oil is purchased by OMCs, who pay freight and transportation charge in addition to crude oil prices per barrel. This oil is then transferred to refineries to be converted into petrol. Here the OMCs pay refinery transfer price to refineries for their services, the oil continue to be owned by the OMCs. OMCs also pay excise duty on this refined petrol before selling it to dealers at a margin. This refined oil, which is in the form of petrol, is then sold by OMCs to dealers, on cost plus profit basis. Petrol is now owned by the dealers. State VAT and dealer’s margin along with pollution cess and surcharge are finally added to the cost of petrol which determines the final retail price of petrol, as it is available on petrol pumps. The above image shows the breakdown of petrol prices as on 1st April, 2017, New Delhi.
Current Price Change Mechanism
As already mentioned above, the price of petrol depends on international crude oil prices and foreign exchange rates, which change daily based on demand and supply forces. However, in India petrol prices are set on 1st and 16th of every month i.e. fortnightly based on average international price of fuel in the preceding fortnight and the currency exchange rate. As such the retail price of petrol should reflect the changes in market crude oil prices proportionately. However, there have been many instances when the prices have failed to change proportionally with the rise and fall in international crude oil prices because of government intervention.
The Debate on Deregulation
Till 2002, the government was following the Administered Price Mechanism (APM), where by the government predetermined the prices at cost plus formula. Here, OMCs were entitled to a fixed return on investment based on their cost of production (normative costs), rather than a price based on demand and supply of the fuel.
This system did not allow competition as there was no incentive to improve efficiency, nor did it generate sufficient financial resources for oil companies to invest in energy security. Thus, APM stunted the growth of the sector and was in a way responsible for its failure to emerge as a globally competitive sector. APM was however dismantled in 2002, and various practices for partial deregulation were adopted between 2002 and 2010.
In 2010, petrol prices were completely deregulated and freed to be determined based on market forces. A shift was made to the automatic price mechanism which would reflect on international market prices and foreign exchange rates. The power to set the final retail prices now lay with the oil marketing firms.
However, since public sector companies controlled a major part of the market the government’s influence on petrol prices continued in the form of political influence. A good example of this is when the petrol prices fail to change during the election period, even though the market prices of crude oil shift radically.
The Indian government continues its manipulation of prices through changes in duties and taxes. The state government also has the authority to scale up the sales tax whenever retail prices come down. For instance, the Government of Maharashtra increased the sales tax in Mumbai by a whopping 400%, which is the highest in the country (S. Sharma 2014).
Daily Fuel Pricing: What to expect?
From 16th June, public sector OMCs such as IOCL, HPCL and BPCL have rolled out daily price change mechanism in all their retail outlets across the country, in line with the best global practices. Thus, instead of fortnightly revision of prices, petrol prices will change daily in tandem with international crude oil prices and foreign exchange rates.
Also, petrol pumps will now follow a system of marginally differentiated pricing resulting in different prices at different outlets of the same OMC, based on location. For example, a petrol pump nearer to the supply station may have a lower price than the one farther away.
This change will help align fuel prices to international crude oil prices and enhance transparency in the pricing mechanism by reducing political overtures in price setting. Additionally, daily change is expected to happen only to a limit of few paisas and is thus expected to reduce the volatility attached with fortnightly changes in prices.
Analysts from Kotak Institutional Equities said in a note to clients recently that a daily change in fuel prices instead of current fortnightly revision will enhance oil market companies’ ability to make gradual changes in prices avoiding any intermittent interventions, reduce volatility in earnings from sharp fluctuation in global petroleum prices during fortnights and eliminate irregularities due to inventory management by dealers on expectations of upward/downward revision in fuel price (Nair 2017).
Under the latest regime, prices are revised at 6 AM every morning at petrol pumps. For petrol pumps, which are automated, the prices will be changed centrally, with no additional manpower requirements.
However, such petrol pumps form only 20% of the total of 58,000 petrol pumps across the nation. For the remaining non-automated petrol pumps, prices will have to be changed manually each day. The non-automated stations can access the information via four distinct means i.e. customized SMS service, Emails, Mobile App & Web Portal for dealers. Updated prices will be immediately exhibited at all petrol pumps for the information of the public. Customers would also be able to fetch daily updated prices of petrol and diesel in all the cities through Indian Oil’s mobile app or through SMS.
A concern raised by the dealers was that how would they be compensated for daily price fluctuations that may happen after they have purchased the oil from OMCs. Mr. Dharmendra Pradhan, Minister of Petroleum and Natural Gas, however felt that this is not a pressing concern as price changes being both negative and positive, would balance each other; and would result in a miniscule impact on earnings of dealers.
To bring fuel prices in greater alignment with the market prices such that they reflect daily changes in international prices is a progressive step towards ensuring transparency in fuel pricing and enhancing competitiveness in the sector. The government as well as oil companies however, need to ensure that proper infrastructure and mechanisms are established at the earliest for successful implementation and continuity of the scheme.
“Daily petrol, diesel price revision: Without required infra in place, expect chaos at pumps.” www.firstpost.com. June 12, 2017.http://www.firstpost.com/business/daily-petrol-diesel-price-revision-without-required-infra-in-place-expect-chaos-at-pumps-3534831.html (accessed June 12, 2017).
Sharma, Rahul, R Jayaraj, and Arvind Kumar Jain. “A Review of Petrol and Diesel Pricing Policy in India.” International Journal of Arts, Humanities and Management Studies, 2015: 87.
Sharma, Swati. Impact of Government Policies on Competition in Indian Petroleum Industry. Dissertation, New Delhi: Competition Commission of India, 20