There are numerous reports in media in which different officials claim different reasons for rising oil prices in India. I find these 2 the most prominent one:
-
“LOSSES” to Oil marketing companies
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Rising prices of Crude Oil in international market
Second reason obviously lead to losses if selling price is not changed, so I thought why not look at the economics behind these things in detail.
At the first instant it comes to mind that why not look at the profit (net income) of the oil marketing and other oil related companies in India. Following is the net income of major oil marketing and other oil related companies in India.
| Company Name | Net Income* (2010-11) | Net Income* (2009-10) |
| ONGC | ₹ 18,924.00 crore (1) | ₹ 16,767.55 crore (1) |
| IOCL | ₹ 7,445.48 crore (2) | ₹ 10,220.55 crore (2) |
| Oil India | ₹ 2,887.73 crore (3) | ₹ 2,610.52 crore (3) |
| BPCL | ₹ 1,546.48 crore (4) | ₹ 1,537.62 crore (4) |
| HPCL | ₹ 1,539.01 crore (5) | ₹ 1,301.37 crore (5) |
*Net Income = Net Sales (Revenue) - Cost of goods sold - SG&A expenses (combined costs of operating the company) - Depreciation & amortization - Interest expense (cost of borrowing money) - Tax expense
It may be noted that first two of these companies are Maharatna and the third one is Navaratna and we know that one of the condition for a public sector unit to be credited with Maharatna title is its net profitability of at least ₹ 2,500 crore consecutively for last 3 years.
I could not find the meaning of “Under Recovery”, the term used in context of losses to these companies. However, I ended up on a news report at CNBC site where Finance Ministry has asked Oil Ministry about what “Under Recovery” is.(6)
Now let us do the math behind the losses.
International Crude Oil prices are varying between US$ 80 to US$ 125 per gallon and mostly it was around US$ 110. One barrel = 158.973 liters. Exchange Rate US$ 1 = ₹ 50.
1 liter of import will cost ₹ 34.597 Now, if we add refining cost (Gross Refinery Margins) which according to CRISIL report was ₹ 4.76/liter** in 2007-08 assuming a constant inflation of 10% it will amount to ₹ 7.66. This gives us a total cost of petrol to ₹ 42.257*
Now if we calculate the different kind of taxes, which are mentioned below, we arrive at a final figure of ₹ 73.02
- Excise duty : ₹ 14.35 per liter
- Customs duty : 7.5 percent
- Sales tax or VAT : 20 percent. (PIB)
A total tax of ₹ 30.766/litre i.e. 42% of the oil cost is tax amount on a product of such importance. However, this will give a significant revenue to the government and considering the fact that petrol has a negative externality associated, it (tax) is correcting the consumption pattern of petrol. Interesting thing to note is that how that tax money is utilized and how much of it goes back into the petrol system in the form of subsidy to “gross under-recovery losses” to oil marketing companies.
* I have deliberately left out various kind of operating and other cost as they are partly covered in the calculation of GRMs and they are very small portion of the cost.
** This figure is different in different texts but this is the highest which I found.
Bibliography
- Annual Trends for Oil & Natural Gas Corporation Ltd. Retrieved November 10, 2011, from Bombay Stock Exchange: http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=500312
- Annual Trends for Indian Oil Corporation Ltd. Retrieved November 10, 2011, from Bombay Stock Exchange: http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=530965
- Annual Trends for Oil India Ltd. Retrieved November 10, 2011, from Bombay Stock Exchange: http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=530965
- Annual Trends for Bharat Petroleum Corporation Ltd. Retrieved November 10, 2011, from Bombay Stock Exchange: http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=500547
- Annual Trends for Hindustan Petroleum Corporation Ltd. Retrieved November 10, 2011, from Bombay Stock Exchange: http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=500104
- Oil Min must disclose under-recovery math: Fin Min. (October 21, 2011). Retrieved November 9, 2011, from CNBC Money Control: http://www.moneycontrol.com/news/business/oil-min-must-disclose-under-recovery-math-fin-min_604067.html