Oil pricing policy in India

Abstract

The global oil consumption stands at about 90million barrels per day and India’s share is about 3 million barrels per day growing at about 4% annually. The Indian Oil and Gas Market is estimated to be about $80bn in 2011 and growing at an annual CAGR or of 10.3%.The maximum revenue of this segment is generated by Crude oil and stands at about $65bn and the Natural Gas constitutes the final $15bn i .India imports about 80% of its crude oil requirements and exports 20% of the petroleum products that it produces after refining crude in its refineries. India has attained surplus capacity in refining over the years, on account of favourable government policies and entry of private refiners into the oil industry. In 2002, APM was dismantled and import parity pricing mechanism was adopted to price the product at refinery. But government still retained the right to set the price at which the product would be sold at the retail outlets. Over the years with government initiatives the Indian Oil sector built up vast refining capacity and in 2005 India for the first time turned into a net exporter of petroleum products. The principle of import parity is economically efficient and truly represents the scarcity value of a product, if actually imported. But the parity provided to the Indian refiners consists the total cost of an imported product – its international price, transportation, insurance, other port handling charges and customs duty. The refiners are in reality not incurring these costs and they started enjoying margins markedly higher than are apparent. The margins of Reliance are way higher than international refiners. When international prices become more and more volatile the OMC’s started complaining of the price pressures they had to bear by buying product from the refiners at the import parity and selling it at government decided prices. Government started paying the oil companies for the losses they had to bear through Oil bonds but after a while when the international prices remained substantially high even this was getting uncomfortable and started jeopardising the fiscal position of the state. Under the recommendation of the Rangarajan Committee the government then moved away from import parity pricing and adopted a new mechanism of trade parity to price refinery gate prices of products. This report tries to do a critical analysis of the adoption of trade parity price. The very idea of retaining import parity price in the pricing structure of a product that the country is a net exporter seems flawed. The import parity prices at the refinery gate for domestically refined petroleum product assume the product has been imported and add all assumed costs that are needed to import it – FoB, transportation, Insurance, while in reality the refiners are only importing crude. This is the most basic flaw. Moreover transporting individual products would way costlier than transporting just crude. Thus refiners are charging prices they are not incurring. We feel that the most apt pricing mechanism would be the export parity price which would be 10-15% lower than import parity. Government seems reluctant to exercise the export parity price because of its in efficient public sector companies have inefficient processes and out dated machinery, many of which are 40 years old. Any reduction of refining margin would put their existence into jeopardy. But this adoption of inflated pricing mechanism is helping none other than the newly built efficient private refiners who enjoy supernatural margins at the behest of Indian consumers who have no say either in price or quality of the product being supplied to them .We have also proposed long term pricing structures for oil in India.