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With the quarter 03 balance sheets of the many Oil marketing companies being on the verge of finalization the expectation of the General Public is that the Oil Marketing Companies (OMC’s) also known as the downstream companies will make substantial profits. 

It’s quite of a perception from the General Public which is quite obivious that the downslide in the crude oil should always translate into profits to the Oil Marketing Companies since the benefits of the reduced processing cost in the form of reduction in the cost of the major input has not been passed on to the ultimate consumers in the equated proportion.

It is very humane for the general consumer to expect a reduction in the prices of the automotive fuel since there has been more than 50% downslide in the international Crude prices since April 2014. The market priced of the crucial fuels like petrol & Diesel now are said to be market linked with the delinking of the prices of the diesel very recently.  But the question that appears that why are the oil cos not exactly passing on the profits & still making hefty margins have their balance sheets in Red.

There are many facets why the fall in the crude prices does not always mean a profit to the Oil Marketing Companies. We shall deal with the issues one by one in this chapter & the succeeding ones.

To understand this we need to understand a bit of the petroleum industry. In the Indian Scenario the petroleum industry has been dominated by the Public Sector Giants - The Indian Oil Corp, Bharat petroleum & Hindustan petroleum & their subsidiaries. Although the private players like the Reliance & Essar have also built substantial capacities, the domestic demand to a large extent is being catered by the public sector giants. The fact that petroleum prices are politically sensitive in India & more importantly have a cascading effect on the prices of other products. Say the prices of diesel may have impact on the transportation cost which further translates into increase in the price of basic products like steel, cement, etc or agricultural produce.

Till recently the prices of various products like MS/HSD/kerosene/ Domestic LPG, which forms a major proportion of the production were heavily subsidized (Will be dealt in details in the subsequent chapter). Now the prices of the MS & HSD have been de regulated.  But do the Oil Cos still have a unlimited power to determine the prices as per their costing is still a matter of debate & there are various schools of thoughts.

However the year 2014-15 had seen quite a favourable tilt in case of India. India satisfies majority of its demand of crude from imports. The prices of the crude have fallen substantially. But the General public is of the opinion that benefits in the ultimate price of the products are not reflected to the Justifiable extent. The scope of the discussion in the chapter following tries to throw some light of the fact where does the actual benefit of the downslide flows.

Reason1: Increase in the Levies & Taxes by the Central Government.

The most simplest reason for this is that the Government has increased the levies on the petroleum fuels. The petroleum sector annually contributes Rs 3.05 lakh-crore to the exchequer; this includes Rs 1.52 lakh-crore to the Centre and an equal amount to states. Source well this translates into more than 50% of the excise duties & this also into a heavy source for the government to reduce the fiscal deficit. Thus the governments have gone into four hikes of excise duty revisions in Petrol & Diesel. The excise on this product is specific i.e is levied per litre. The govt mopped up 4500 crores extra with the first revision, Rs 6000 crores extra  with the 2nd revision & estimated 8500/- crores extra with the third revision. 

To better illustrate the situation the fall in the price of the crude along with the corresponding fall in the price of the Petroleum products the data has been tabulated below. For the sake of convenience only Petrol (Motor Spirit) & HSD (High Speed Diesel) which form a major portion of the retail consumer demand & also the Refineries production capacity has been considered.

Month

Crude Prices        (In US$/ Barrel)*

Motor Spirit         (Rs / lt) ** (Mumbai)

Diesel                     (Rs / lt) ** (Mumbai)

June 2014

109.05

80.11

65.84

Dec 2014

61.21

70.95

60.11

Jan 2015 (17th Jan)

45.76

66.36

55.47

 % Change (here Reduction w.r.t to  April 14 resp  for Dec 14 & Jan 15

43.87 %

&

58.04%

11.43 %

&

17.16 %

08.20 %

&

15.75%

Source : PPAC website.

From the above tabulated table, it may prima facie look that the retail consumer has not been benefitted from the fall in the crude prices to a larger extent. But how much of the benefits have actually accrued to the Oil Cos is a matter in question.

An effort has been made in the below mentioned table to provide a very simple view of how much surplus money actually lies in the hands of the corporation after meeting the crude cost. To analyse the situation prices effective in New Delhi have been taken & the prices have been quoted from 

Calculations Delhi
Petrol   Diesel
    07.06.2014 17.01.15   01.06.2014 17.01.15
Avg retail price **           71.51          58.91             57.28          48.26
Less Vat Delhi VAT @ 20% ** source PPAC           11.92            9.82      
  Delhi VAT @ 13.11 ** source PPAC                   6.64            5.59
  Net of VAT           59.59          49.09             50.64          42.67
Less Dealer Comission             2.03            2.03               2.03            2.03
  Net of Dealer Commission           57.56          47.06             48.61          40.64
Less Excise Duties             9.48          17.47               3.50          10.26
  Net Revenue to OMC's            48.09          29.59             45.11          30.38
             
Coversion of barrel          
  Crude cost / barrel ($)         109.05          45.76           109.05          45.76
  Rate of exchange (RBI fig)          
  on  09.06.2014           59.06               59.06  
  on  16.01.2015            61.89              61.89
  Cost in Rupees / Barrel     6,440.49    2,832.24       6,440.49    2,832.24
# one crude barrel = approx 159 Lts         159.00       159.00           159.00       159.00
  Per ltr of Crude price (b)           40.51          17.81             40.51          17.81
             
  Revenue to the Oil Co's net of Crude prices   (a-b)             7.58          11.78               4.60          12.56
(i) Thus Oil Co's Gained after Crude downslide              4.20                7.96
             
(ii) Actual Fall in Crude prices / lts            22.69              22.69
  Benefits transferrred to Customers - price reduction            12.60                9.02
  Increase in Central Levies              7.99                6.76
  Benefits accrued to the Oil Cos              4.20                7.96
  Decrease in the State VAT - Advalorem            (2.10)              (1.05)
               22.69              22.69

The above table is just a simple summarization of how the major portion of the downslide was used for developmental increase in the excheque & thus a very less portion was taken over by the Oil Co's.

Further the surplus as shown is only after meeting the crude cost. The other major cost viz the transportational & operational cost & the other operational & Transit losses have not been considered. This shall be dealt in the next issue-

While writing the article there was a further reduction of the prices of petrol & diesel by Rs 2.42 & 2.25 

Further many other issues like loss on inventory & underrecoveries before the downslide are to be discussed. Your comments are valuable.

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