OMCs haven’t been fully passing on the increase in landed costs to consumers
While high fuel prices are a burden on the consumers and inflate costs across the board, the oil marketing companies haven’t been fully passing on the increase in landed costs — which get reflected in the ‘trade parity price’ (TPP) they follow — to the consumers in recent weeks. Over the 16 days to Tuesday, a period which saw continuous daily increases in retail prices of petrol and diesel, the (notional) landed price of petrol increased by 9.4% (an average of 0.58% a day), while the fuel’s retail price in Delhi went up by 5.1% (0.32%/day) only.
On Wednesday, the OMCs decreased the retail prices by a nominal 1 paise/litre but the landed cost of petrol on the day was the same as Tuesday’s at $89/barrel and the rupee too remained at the same level against the US dollar, at an average of 67.93, on both days.
According to sources familiar with OMCs’ pricing methodologies, various charges like BS premium, inland freight and delivery charges as also marketing costs and margins of OMCs are added to the TPP — which is also the refinery transfer price or the price at which the refiners sell products to oil marketing firms — to find the price to the dealers, upon which the dealer commission, central excise, and later, state taxes are levied to arrive at the retail prices to the consumers. Some states levy VAT on the rate inclusive of dealer commission.
Asked about the rationale behind Wednesday’s 1 paise cut in prices, a former OMC executive told FE that even the TPP and a subsequent price build-up formula are generally followed by the OMCs, assorted variables impact day-to-day pricing and this could change from company to company and from place to place. “There are many cost and management strategies which are followed,” said the executive, emphasising that “pricing is free.”
Under the mechanism of TPP (pricing is now linked to import and export prices of diesel and petrol, although global crude prices have an indirect bearing on these), an 8:2 ratio of import and export parity prices are used. All the three OMCs—IOC, BPCL, HPCL—consider different cost and freight (C&F) prices of landed fuels. For instance, while IOC considers the petrol price at $89 per barrel on Wednesday, HPCL and BPCL considered it at $88.98 per barrel.
No wonder the three companies quoted different prices charged to dealers for per litre of petrol on Wednesday (IOC: Rs 38.63; HPCL: Rs 38.66 and BPCL: Rs 38.65). The final price charged to consumers by the three companies differ too and prices vary across retail outlets as well.
The commercial freedom enjoyed by the OMCs is also evident from the fact that costs and prices are not always moving in tandem. For instance, while C&F price and exchange rate were the same for petrol on May 22 and 23, price charged to dealers by IOC increased by 22 paise on May 23 from the previous day’s level. Similarly, while the cost remained the same on May 15 and 16,dealers were charged 11 paise more on May 16.