Posts Tagged ‘brent crude’

Do Petro Price Cuts Reflect the fall in crude oil price?

December 3, 2014

Do diesel, petrol price cuts really reflect the fall in crude oil price?

Pallavi Pengonda

Brent crude oil prices have declined by 18.3% in November. But since the rupee, too, has declined against the US dollar, the Indian basket of crude oil has dropped at a slower pace of 12.3% to Rs.4,355.87 per barrel in November. And yet, retail petrol and diesel prices in Delhi have dropped a much lower 1.4% and 1.6%, respectively, from 1 November to 1 December.

petro-graph

It’s easy to argue that oil companies typically revise prices every fortnight on the basis of average prices for the previous fortnight, which is why there is a lag. But these average calculations are not really for one fortnight. For instance, pricing for the first fortnight this month is based on the average prices from 13 November to 26 November. Pricing for the first fortnight of November was based on average prices from 11 October to 29 October.

Nevertheless, going by those calculations too, the drop in prices seems much lower than warranted. Consider this: average crude prices in the second fortnight of November declined by 9% compared with the second fortnight of October, according to data from the Petroleum Planning and Analysis Cell. And average crude prices of the Indian basket in the last fortnight itself fell by 5.5%. So how is it that consumers gained much less even through petrol and diesel pricing is supposed to be set by markets?

Sure, one reason for the stark variance is that the much-anticipated price cut in mid-November was said to be set off against the excise duty hike. Nevertheless, even after adjusting for the excise duty hike, petrol and diesel prices in Delhi have fallen by about 3.8% and 4.4%, respectively, in the last one month. Analysts reckon that international diesel prices haven’t fallen as much compared with Brent.

Still, the difference in the rate of decline between average prices in the Indian basket of crude and retail prices is difficult to ignore.

This leaves many questions. Why aren’t prices actually market-related? There is no reason why we cannot look at daily change in retail fuel prices in India when international oil prices and currency exchange rate details are published on a daily basis. The argument that the implementation of daily revision in retail selling prices would lead to an increase in volatility does not hold much water given the fact that prices of another significant commodity, gold, are updated on a daily basis. Secondly, how is it that retail prices of the state-run oil marketers are almost similar?

Finally, the million dollar question is, why is the entire benefit not passed on to consumers?


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