Is the fuel price hike justified? What is the real fuel price?

On 4^th of June 08, the Indian government declared an increase in petrol (Rs. 5/litre) and diesel (Rs. 3/litre) prices because of the mounting losses of the oil companies. The global crude oil prices have been hovering at ~ 130 $/barrel for quite some time now and the oil companies were loosing money in crores on a daily basis. The Indian prime minister even came out to the address the nation saying that this the minimal hike that was possible looking at the current scenario.

This made me to wonder, what is the real price of fuel? Who makes all the money and who carries the losses.

I started doing some basic calculations and started hunting for data in the web. Well, first let do a straightforward calculation, what is the crude oil price (in INR)? Taking a recent crude oil price of $130/barrel and using a conversion rate of Rs.40/USD, the crude oil price becomes ~ Rs.32.71/litre. Petroleum price after the current price rise will be Rs.55/litre (average nationwide). So we are talking about a petrol price which is ~170% of the crude oil price. So somebody must be making money (and not lossi), as it’s hard to believe that refining cost would be that high. I do not have any refining cost data, so the next step would be to hunt for that information. (What’s still in back of my mind is, oil companies are making losses in crores)

I came across a gasoline price breakdown report from “California Energy Commission” website (http://www.energy.ca.gov/gasoline/margins/index.html). They showed the split of all the costs starting from crude oil price to retail price, separately showing the refining cost and also taxes charged by the federal and the state governments. I believe the cost breakdown structure will be similar in India, excluding the tax structure. Looking at the May month’s data, the refinery cost along with the profits accounts for 7.5% of the crude oil price.

Taking this scenario in India, where the retail price is 170% of the crude oil price, and refining expense (with profits) is only 7.5%. The rest of the amount must go away in taxes and other components, which is retained by the central and state governments in India. As a layman what I understand is governments do not want to loose their own share of the money, and they are trying to nail down the oil companies out of their profits, and finally they transferred part of the financial burden to the consumers.

The government should not risk loosing the stream of their revenues, as this might affect the other developmental activities as well as the fiscal deficit might climb up. But looking at the developed economy like the United States, their retail price is ~ 135% of the crude price. Thus the US consumers are paying less then what we pay in India, even after subsidies? Something hard for me to comprehend… May be I needed to go back and check my economics.

Here are excerpts from what the petroleum minister told the Rajya Sabha (pretty old data, 2005) which gives some insight:

http://www.moneycontrol.com/mccode/news/article/news_article.php?autono=193793

“Giving a break-up in the Rajya Sabha on Tuesday, the Petroleum Minister said the cost of production of petrol was only Rs 19.58 per litre, whereas the Customs duty, excise duty and sales tax take the retail price to Rs 43.49 a litre (in Delhi). The tax component is almost 55%.

For diesel, the tax component in the retail price is almost 34%, with customs duty of 6% (Rs 1.81), excise duty of 17% (Rs 5.07) and sales tax of 11 per cent (Rs 3.39). This takes the retail price to Rs 30.45 a litre in Delhi, while the basic cost of production of diesel is only Rs 20.18 a litre. As for cooking gas, while the production cost of one cylinder of LPG is Rs 261.97, local sales tax of Rs 32.75 takes the selling price to Rs 294.75. For kerosene, the per-litre cost is Rs 8.70, while the selling price is Rs 9.05.”