Petrol Prices hiked by 2%, Diesel Untouched for Now

Get ready to pay more for petrol, Indian Oil Corporation, last night hiked the price of petrol by Rs 1.40 per litre. Petrol will now cost Rs. 70.46 in Delhi, Rs. 77.29 in Mumbai, Rs. 73.57 in Chennai, and Rs. 77.99 in Kolkata.

The actual pinch at the pump is higher from the Rs 1.40 hike, as State Governments have decided not to forego the extra revenue they stand to rake in from the increase. While Diesel prices have not been increased, they are likely to go up by approximately 50 paise. Starting from January this year, state owned oil companies have been allowed to increase the prices of Diesel by up to 50 paisa every month, until under-recoveries are completely eliminated. At present, state owned oil firms are suffering an under-recovery (revenue loss) on the sale of diesel of Rs 11.26 per litre.

Any reduction in fuel prices, according to IOC will take place only in the second quarter, as that is when International petrol prices will start leveling back. This is the 21st time that petrol prices have been increased, since the fuel was deregulated in 2010. Interestingly, while the price of petrol has been increased 21 times, it has been reduced only eight times till date! The price that we pay for Petrol includes Central excise duty (Rs 14.35 per litre fixed), customs duty (7.5 percent), sales tax (25 percent in states like Karnataka) and entry tax (5 percent in states like Karnataka).

The actual cost to oil companies for making Petrol and Diesel
The pricing of fuels such as Petrol, Diesel, Kerosene and LPG follow a convoluted pricing pattern that is hard to make sense of. Simply put, the cost of fuel includes purchase of crude oil, transportation, refining, taxes imposed by the central and state governments and finally retail costs. According to a statement in 2011 by then Minister for Petroleum & Natural Gas, Jaipal Reddy, “Refining is a process industry, where crude oil constitutes around 90% of the total cost.” This means that the cost of refining a barrel of crude oil is only 10 percent.  Crude oil is processed through several processing units such as Crude Distillation Unit (CDU), Vacuum Distillation Unit (VDU), Fluid Catalytic Cracking Unit (FCCU), Hydro Cracker Unit, Lube Unit etc. These then produce intermediate product streams, which require extensive reprocessing and blending. Petroleum products are processed from a blend of these various intermediate streams. Now, the actual cost of production for petrol and diesel is not made available publicly by oil marketing companies. However, they pay what is called the ‘Refinery Gate’ price, when they purchase Petrol and Diesel from refineries. ‘Refinery Gate’ price is based on ‘Trade Parity’, which is the weighted average price of Import Parity Prices and Export Parity Prices in the ratio of 80:20. For e.g. on August 1st, 2011, the ‘Refinery Gate’ price for Delhi was Rs 35.39 for Petrol (according to IOC) and Rs 37.46 Diesel (according to the ministry).  

Making Sense of a Litre of Petrol (price as on August 2011)

* VAT as per Delhi.  It varies from 33 % to 15 % from State to State,
** Petrol Price was decontrolled with effect from 26th June, 2010. The price break up is as per IOC.