Petrol and diesel prices are already quite high. Futures trading in them will only be speculative in nature and aggravate the rising trend in their prices to the detriment of consumers. SEBI should, therefore, desist from allowing futures trading in these two petroleum products.
The Securities and Exchange Board of India (SEBI) is reported to be in the final stages to permit futures trading in petrol and diesel—Indian Commodity Exchange Ltd (ICX) has urged SEBI to allow it to trade in futures contracts for petrol and diesel. As it is, futures trading is allowed in crude oil. Petrol and diesel are, among others, the two major refinery products derived from crude oil. Hence, crude oil futures contract currently serves as a proxy for hedging in both petrol and diesel.
This is not all. In the US, the world’s leading and most diverse derivatives marketplace, the CME Group comprising four exchanges—CME, CBOT, NYMEX and COMEX—offers the widest range of global benchmark products across all major asset classes. Its energy markets fuel almost all the world’s leading economies, and impact nearly every nation, including India, which is one of the world’s largest importers of crude oil and petroleum products. Futures and options on crude oil, refined products, natural gas, power, biofuels and coal at NYMEX help industry members and everyday investors in India to manage their price risk on imports and distribution of both crude oil and petroleum products like petrol and diesel. In the US, there are as many as 10 oil producing and distributing companies—British Petroleum, Chevron, ConocoPhillips, Exxon Mobil, Occidental Petroleum, Shell Oil, Anadarko Petroleum, Apache Corporation, XTO Energy and Amerada Hess.
The price of crude oil in the US is determined by the global supply and demand. In recent years, the worldwide demand for crude oil has increased, and at times caused global oil prices to rise. Crude oil is the single-largest factor in determining the price of gasoline at the pumps in the US.
In the US, at the gas stations (petrol pumps), the choices usually include the premium (most expensive) grade, the midgrade, the regular/unleaded (least expensive)—typically labelled in black—and diesel (typically labelled in green). The prices not only vary from grade to grade, but also from one producing company to another, besides from gas station to gas station.
In India, private fuel retailers like Rosneft-owned Essar Oil and Reliance Industries have doubled their market share in the last three years, capturing close to 7% of petrol sales and over 8% of diesel sales. Private companies were allowed to sell petrol and diesel in March 2002. From April 2002 onwards, fuel pricing was also deregulated. Consequently, Reliance, Essar and Shell set up petrol pumps to directly compete with public-sector giants like Indian Oil (IOC).
In the initial years, private firms were aggressive in setting up of petrol pumps. However, they slowed down once government control over pricing came back in vogue in 2004-05, and they couldn’t compete with subsidised fuel sold by PSUs. The government freed petrol price from its control in June 2010, and the same for diesel was done in October 2014, giving a fillip to fuel retailing by private firms. In 2017-18, private retailers commanded 6.8% market share in petrol sales and 8.2% in diesel. Private retailers sold 5.18 million tonnes of diesel in 2017-18. PSUs—IOC, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL)—reported diesel sales of 58.29 million tonnes in 2017-18. Through the past four years, India’s fuel consumption grew by an average of 3-4% annually. In petrol, PSU sales were 21.99 million tonnes in 2017-18, against the sales of private retailers at 1.59 million tonnes in the same year. Over the past four years, private sales of petrol are rising at the cost of public sector sales.
India had 61,678 petrol pumps as of January 2018. IOC operates the maximum (26,752 pumps), HPCL has 14,853 pumps and BPCL has 14,293 pumps. In the private sector, Essar has 4,275 petrol pumps, while Reliance has 1,400 retail outlets and Shell operates 100 petrol pumps.
In India, the pricing of petroleum products plays a crucial role in its economy, as over 75% of consumption of crude oil is based on import, and the world market price of crude oil is highly volatile. Although the prices of petroleum have been deregulated since 2010, there has been no symmetric relationship between crude oil prices and those of petrol and diesel.
Fuel prices are determined by trade pricing parity, comprising 80% import price parity and 20% export price parity. Beginning June 16, 2017, all petrol pumps across the nation have been changing their petrol and diesel prices each day, based on international market prices of crude oil and foreign exchange rates. These prices are fixed at 6:00 am in the morning every day. Prices, however, differ from city to city to make allowance for transport costs from oil refineries.
Components of petrol prices
Crude oil is the major raw material for both petrol and diesel. At present, 75% of India’s crude oil needs are met through imports. Therefore, international prices of crude oil and foreign exchange rates form the base components of prices of petrol and diesel in the country. Ironically, the import price of crude forms only a small portion of the retail price of diverse petroleum products. The final price is determined by a host of other factors. In fact, more than 57% of the retail price of petrol and diesel goes towards central and state taxes, duties, cess and dealer margins. While the central excise duty is a major component of taxes on petrol and diesel, state value-added taxes, which are ad valorem, vary from state to state.
Nevertheless, since public-sector oil majors determine the day-to-day prices of petrol and diesel, there is obviously no case for futures trading in them. These prices are based on cost-plus basis. So, petrol pumps are not at a loss. There’s no need for them to hedge either their purchases or stocks of petrol and diesel. By and large, they live on hand-to-mouth basis. It is indeed naive to expect them to hedge their purchases and stocks in a futures market. Petrol and diesel prices are already quite high. Futures trading in them will only be speculative in nature and aggravate the rising trend in their prices to the detriment of consumers. SEBI should, therefore, desist from allowing futures trading in these two petroleum products.
-Madhoo Pavaskar is an economist, with specialisation in commodity and commodity derivatives economics. Views are personal