Not a refined process

15 Mar 2021

Opinion: Sanjib Pohit

Auto fuel pricing goes beyond taxes to refineries

The discourse around the spikes in gas petrol and diesel prices follows the usual line. The government argues that the consumer has to bear the high price because global crude oil prices have hardened. The Opposition argues that the higher domestic price is due to frequent upward revision of taxes on petrol/diesel/gas. When crude oil price declined duties were revised upwards so that the government’s tax revenue from petrol/diesel/gas did not decline.

The opaqueness of India’s domestic oil prices regime hides many thing. First one is not sure whether Indians pay a high price due to the inefficiency of the oil companies. Of course one can argue that Indian oil companies are Maharatna public sector enterprises which give dividends year after year to the Centre. So how one can argue that they are inefficient and badly managed?

No doubt the monopoly of the public sector oil companies ensures that their profits are guaranteed. Unlike other countries import of refined petrol diesel or gas is not allowed by third parties in India so that domestic oil refineries can operate at near full capacity. So there is no way to judge whether a private enterprise can sell petrol/diesel at a lower price after paying taxes on the specified commodities.

Like many other countries India imports crude oil refines it domestically and sells it to the consumer. This further complicates the cost calculation process. The distillation of crude oil in a refinery produces multiple products which are classified into four categories: light distillates (LPG petrol heavy naphtha) middle distillates (kerosene automotive and railroad diesel fuels residential heating fuel other light fuel oils) heavy distillates (heavy fuel oils wax lubricating oils asphalt) and others.

Of these only a few products — petrol diesel kerosene gas and aviation fuel — are not allowed to be imported directly by third parties and to be sold to the consumers/end-users. By contrast imports of other commodities in the chain are allowed by third parties. So the market price of these commodities have to be in line with global prices else the oil companies will land up with unsold stock of these by-products. Typically the by-products from the distillation process of crude oil amounts to about 35 per cent by volume depending on the type of crude oil. So the importance of by-products in the production process cannot be underplayed.

Clearly in this kind of processing how does one determine the true production cost of petrol/diesel/gas? This is not a clear-cut exercise. If the refinery is inefficient there is an element of cross-subsidisation (that is decontrolled by-products prices are subsidised by higher price for administered products) that comes into play.

There is another angle as well. There are refineries which are inefficient and use obsolete technologies. The cost of processing for such refineries is high and they are subsidised by the efficient ones. As a result the overall cost of processing by the oil companies goes up.

Lately state-owned oil refineries spent about ₹35000 crore to upgrade plants that could produce Euro 6 fuels (ultra-low sulphur fuel). This investment is on top of the ₹60000 crore they spent on refinery upgrades in the previous switchovers. No doubt this cost is expected to be passed on to the consumer. If the oil companies have planned for a short-time horizon to recover this cost one can expect domestic oil price of controlled products to move upwards.

Policy-makers need to know whether our oil companies/refineries are efficient by world standards. Only then can one identify the ex-post and ex-ante factors behind high domestic oil price.

The writer Sanjib Pohit is Professor at NCAER. Views are personal

Published in: Business Line, March 15, 2021