antz.bin

Recently, Petrol pricing has been a topic of discussion since another Petrol price hike has been announced by the govt. of India. Since all the members here are affected by these continuous price hikes, I tried to go a bit in depth trying to understand the economics of Fuel pricing and how the government is looting the common man under the pretext of fuel subsidies.

This is a complex matter to understand at first. But as soon as the numbers start flowing in, we will understand the extent to which the government has fallen in order to rob the public under the pretext of 'welfare of the poorest'.

Starting from the basics. We must understand where all this Petrol comes from, How it is produced and distributed.

Firstly On refining and post processing crude oil, the following things come out.



The mathematicians amongst us would try to find faults in this data. So, the following link is for self study for them. The example used is from US. But percentages wouldn't change, would they?

Where Does Our Oil Go? | Mean Green

Short Descriptions for the non-self-explanatory terms:

Refinery losses : Wastage due to things not turning out too well.
Refinery Gain : Volume gained during the refining process due to addition of additives

The current price of 1 Barrel of crude is $93.99. In the interest of overcorrection, I am approximating this to $100/barrel OR Rs. 4900 (as per current FOREX prices).

One barrel is equal to 158.98 liters.

So, per liter cost of unprocessed crude oil is
$100/158.98 = 63 cents OR
Rs. 31/liter. (over-corrected again)


Now considering the Petrol component of this oil.

Considering prices of Petrol in Pune since this price is close to the national average. It is neither the highest nor the lowest price at which Petrol is sold in the country.

Petrol is sold in Pune at Rs. 74.06/liter.
Reducing
Refining cost : Rs.0.60
Transportation charge : Rs.6.00
Dealer Commission : Rs.1.05
Octroi @4% : Rs.2.85

So, the money recieved by 'Govt. owned' Oil Marketing Company before tax.
Rs. 63.56/liter.

Considering the fact that 50.41% of all crude oil imported in the country is sold as petrol, the government sells the Petrol coming out of a Barrel of crude for a total of Rs.5091.25. (which was bought for Rs.4900 for all of it).

Now coming over to the Diesel component

Diesel is sold in Pune at Rs.43.23/liter.
Reducing
Refining cost : Rs.0.80
Transportation charge : Rs.6.00
Dealer Commission : Rs.1.05
Octroi @4% : Rs.1.47

So, the money recieved by 'Govt. owned' Oil Marketing Company before tax.
Rs.33.91/liter. Which is still more than what govt. bought it for (Rs.31).

I wonder why the government was crying foul that the OMCs are making a loss of Rs.6/liter by selling Diesel at current prices.

Since the Diesel component is 22.95% of all produce from Crude oil. That comes to 36.67 liters per barrel which is sold for Rs.1243.61(Pure profit this time)

At this point of time, only 73.36% of all crude oil imported has been sold. And the government has already made a profit of Rs.1434.86/barrel (29.28% profit overall profit. 76% profit on value of product sold.).

It is a known fact that government / OMCs do not give away stuff like Jet Fuel, LPG, Non Jet Aviation Petrol for free and make money in selling all this.


Now coming to the stuff which is supposedly subsidized for the Poor. i.e. Kerosene.


From our table above, we can see that the total component of Kerosene in crude is 0.11%. So, in 1 barrel of crude, just 175.78 ml of kerosene can be separated. The cost of subsidy of this kerosene is Rs.5.39/barrel. Assuming that the Govt. gives away this kerosene to the poor for free (which they actually do.. well almost). The cost of this component is just Rs.5.39/barrel.

Now upscaling this oversimplified calculation into actual numbers.

India imported a total of 14.15 Million Tonnes of Crude in the month of August 2011.

Source: India Aug crude oil imports rise 5.6%, fuel product exports dip - NDTV Profit

This equals to 10,10,71,428 barrels of crude.

So, By selling just the Petrol and Diesel in this imported crude, Govt. made a cool 1,45,02,33,50,000/- (14,502 crores in one month) had it been bought for $100/barrel. But the crude basket for the said month was much below this amount as the crude prices haven't gone over the $100/barrel since April 2011. The govt. also gave away 2.32 Liters of Kerosene / person for free even though most people in the cities have never seen a drop of petrol for a few years now.

We must understand that the revenues coming from sale of LPG, Jet fuel, Asphalt, Naphta, Petroleum coke has not been included in this aforementioned 'Profit' figure. I have not bifurcated this figure any further as all of it eventually goes to the government in the form of Taxes / Profits for the OMCs. Where, may I ask is the under-recovery, loss and subsidy?

As a side note:
By comparison, have a look at the Totally De-Regulated prices of fuels in Pakistan. (which BTW were reduced on November 1 2011). Which, even though quite high, still seems reasonable in comparison.

Petrol (E10) : INR 49.43/litre
High Speed Diesel : INR 53.41/litre
Light Diesel : INR 46.51/litre

Sources:
Consumer relief: Petrol price reduced by Rs1.5 per litre – The Express Tribune
Welcome to Pakistan State Oil

Noor

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siddharth_ZMR

Hi,

the basic breakdown is correct but 63.56 is not received by the oil companies... there is excise duty of 4%, special duty both are collected by Central govt and VAT and octroi are collected by State Govt... due to all these taxes the fuel prices are high.... afterall politicians need these taxes to fill their stomachs...

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saipranav

@^^^
dude, do you really have to quote the ENTIRE post?

@topic, good write up, btw, some of my bhutanese friends told me that their government purchases petrol from india and yet they get it for a lower price than us... is it true? how is that possible?

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chicmagnet

^^ Yes. Petrol in thimpu costs Rs.62.89 and all the petrol in Bhutan is imported from Indian Oil and BP. In fact, according to news reports, these companies are citing 'financial losses' for increasing petrol in Bhutan - 13 times in the last one year.

It is possible that Bhutan does not levy the myriad taxes that the Indian government does.

saipranav

@antz.bin
The percentage of petrol coming from a barrel of crude oil changes from place to place, WTI crude oil gives lesser petrol than compared to brent crude oil, so did you check that factor and also, where does india get its oil from, which country?

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aargee

@antz.bin - Tks for sharing the article; deserves 5 star for sharing
siddharth - Can you edit your post & shorten the quote pls?

I always have a thought that, if the oil companies are making crores of losses every year, then...
- Why're they still doing the business?
- Why can't they simply give up & hand it over to some private companies who can handle the business better?

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antz.bin

So, could you please point me to the correct link?

I know there are a LOT of issues in my approach as amply discussed elsewhere. I will post a 'revised calculation' made by someone else which will give us the actual beneficiary of the current situation.

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chicmagnet

But we do have a private company 'Reliance' whose petrol prices are much higher than at PSU run oil bunkers and it doesn't give better mileage either (atleast it didn't give to me).

saipranav

Even im not sure about it, what ever knowledge i have is what i got through wiki a couple of months back, even then i tried to find out exactly from where india is buying its oil and how sweet is the oil obtained from assam/KG basin(sweeter=morecostly=more productive oil), will try to go through those pages again and check if wiki has something new to it.
I follow the oil rate everyday through this page CRUDE OIL PRICE: Oil | Energy | Petroleum | Oil Price | Crude Oil Charts | Oil Price Forecast

That is because Reliance practically purchases petrol/diesel from public sector oil companies, thats exactly the reason why reliance is more costly and had obviously didnt get customers, and they closed down, now they are opening up again probably because they managed to bribe A.P. government and occupy a large part of K.G. Basin.

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