From 1 May, petrol and diesel prices from state-owned retailers across five cities in India will change daily in sync with international crude oil prices. This is a pilot project to see if such a system can be brought to the whole country shortly. Just how is that going to affect petrol and diesel prices for you?
This project is being implemented in Chandigarh, Udaipur, Vishakhapatnam, Jamshedpur and Puducherry. The effects of daily revision of fuel prices in these cities will be monitored and the Central government may then roll this out pan-India.
How Are Fuel Prices Calculated?
Here’s how it works. Fluctuation in crude oil prices globally will directly have an impact on the retail price of petrol and diesel daily, unlike the fortnightly revisions currently in place. But it may not be as drastic as you may think.
You are paying more towards taxes than the actual cost of the product. Nearly 57% of the price of a litre of petrol and 48% of the price of a litre of diesel goes towards excise, VAT, cesses and dealer margins.
Petrol prices were fully deregulated in 2010 and diesel prices in 2014. The refinery transfer price or the price that oil marketing companies (such as Indian Oil, Bharat Petroleum and Hindustan Petroleum) must pay to refineries per litre of fuel has very little difference between petrol and diesel. Even the price that dealers must pay has very little difference.
However, the excise duties that are charged on petrol are fixed at Rs 21.48 per litre and for diesel it is lower at Rs 17.33 per litre. And then comes dealer margins at the pump. This is something that state-run petrol pump dealer associations have been fighting to increase since 2011. Right now, it is fixed at Rs 2.58 per litre of petrol and Rs 1.65 per litre of diesel.
Then come state taxes. In Delhi, VAT is charged at 27% per litre of petrol and 16.75% per litre of diesel. In addition, there is an air-pollution charge of Rs 250 per kilo-litre on diesel. Adding all these taxes and charges, you arrive at the retail price of petrol or diesel.
Factors Affecting Fuel Prices
Now, if oil prices were to change daily, we would have to closely monitor the Indian Basket crude oil prices. As of 28 April, oil prices stand at $49.94 per barrel. They have been on a downward trend since 17 April (when the last price revision was calculated). At that point, Indian Basket crude was trading at $54.59 a barrel. A barrel can hold 159 litres of crude oil.
Add freight and shipping, and it works out to about $10 to $11 per barrel to get you the actual landed cost per crude oil barrel at the oil refinery, which was between $64 and $66 a barrel in mid-April. If oil prices continue to rise dramatically, so will petrol and diesel prices.
The only way the government can then bring relief to consumers is to cut excise duties. The government can afford to do that now, as it is sitting on a surplus, having hiked excise duties quite steeply a few times in the past two years to keep fuel prices from falling drastically, when global crude oil prices dropped to as low as $30 a barrel.
The fall in crude oil prices helped the government mop up losses due to subsidies being offered to oil marketing companies on diesel and petrol earlier.
How to Monitor Fuel Prices?
The cities that will be implementing daily price movement of fuel will have large LED boards displaying the day’s fuel prices. These prices will be relayed by the Petroleum Ministry to the oil marketing companies, who will then convey the prices to dealers by 8 pm everyday.
The revised price then becomes effective at midnight. However, the variance in prices on a daily basis is likely to be only a few paisa, so don’t expect to find long queues at the fuel stations.