But still running on a controlled formula

Last Updated: Mon, Nov 28, 2011 07:17 hrs

The government may have delivered on market-driven pricing or decontrol of petrol prices in June 2010, but it seems the state-owned oil retailers are yet to cut the umbilical cord as far as fixing the fuel's pump price is concerned. This, even in instances where there was no apparent political wink-and-nudge to change prices - as happened on November 4, the last time prices were jacked Rs 1.82 a litre.

A dozen changes and 18 months later, oil marketing companies Indian Oil, Hindustan Petroleum and Bharat Petroleum still rely on a five year-old government-set formula to charge consumers filling up their tanks at the 39,000 petrol stations across the country. Oil companies arrive at the retail price of petrol by computing trade parity price - a practice started after the recommendations of the government-appointed Rangarajan Committee in 2006. C Rangarajan, a noted central banker and an economist, is currently the head of the prime minister's economic advisory committee.

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The trade parity price formula broadly arrives at domestic petrol price through an averaging of post-tax import and export prices of petrol in the proportion of 80:20, respectively. The moot point, however, is this: If they have the freedom to price it, why are these oil companies still sticking to the old, control-regime price fix and not shifting to market-determined or cost-plus pricing?

The reason is simple. Oil companies like to have a cushion provided by the formula, as they import more than 80 per cent of their crude oil requirement. And, taking import parity price as a variable acts as a hedge against the changing crude prices, which accounts for 92 per cent of their costs.

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"The pricing formula is required to have a listed price," says S V Narasimhan, former director (finance), Indian Oil Corporation. "In a mature market, the actual price may be different, depending on the discounts being offered."

Effectively, what oil marketers are doing is using the trade parity reference price as the final consumer price. Well, nothing wrong with it, only that when all big players follow it irrespective of their individual businesses efficiencies, it makes a virtual mockery of a free market dynamics that petrol decontrol was supposed to herald.

Diesel, kerosene and liquefied petroleum gas (LPG) for households is still under government price control, and oil marketers get subsidies from the government and discounts from government-owned suppliers for selling it below cost price.

Narasimhan, though, defends trade parity pricing, saying it should be good even in a deregulated regime if it was good enough in the regulated environment. Drawing a distinction between decontrol and competition, he says competition will be possible only when private sector retailers join in a big way, but that will happen only if diesel is decontrolled. Private players like Reliance and Essar are not entitled to subsidies.

"Private sector players like Essar and Reliance," he adds, "currently price petrol close to public-sector prices or lower. So, there is competition in that sense. But, for them, it will be viable to operate their outlets fully only if diesel is decontrolled." Since state retailers control virtually all, about 93 per cent of retail trade, they also continue with their oligopolistic pricing of petrol.

Ajay Arora, partner and head (oil and gas), Ernst & Young, sees the lack of a consistent pricing policy keeping the private players away from the market. "Decontrol should be supported by a transparent pricing formula with regular adjustments," he says. "This will give confidence to private players. It will also help in creating a level playing field between the public and the private sector."

Is there hope for real competition kicking off in retail anytime soon? A senior person at the oil ministry, who should know but did not want to be quoted, gives thumbs down: "Even if companies start pricing petrol differently, the difference will be in the range of 30 paise to 50 paise since large part of their costs is crude oil. Besides, the big markets in Tier-I cities are saturated by PSU outlets. Private sector is present only in a limited way. Only competition that we will see is on the highways."

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