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Crude Price Falls, But Govt Keeps Raising Excise Duty To Match


The government has, for the third time in two months, raised excise duty of petrol and diesel by Rs. 2 each. This means there’s no change in the retail prices of petrol or diesel. (Effectively, Oil Marketing Companies have cut the prices of petrol and diesel, and the increased excise duty makes up for it)

The government has to do this on it’s deficit problem, which we explain as reaching gargantuan proportions as of November.

The analysis:

  • The input prices of crude oil have reached $53 per barrel. This is about half the $110 we used to pay earlier!
  • Petrol prices are supposed to be market linked but they obviously are not – from Rs. 80 the price has only fallen to Rs. 68.
  • There’s a 1000 cr. liters of petrol+diesel India consumes per month.
  • The government will earn Rs. 5.75 more for petrol (increase in excise) and Rs. 4.50 on diesel. That should help cut the deficit by Rs. 5,000 cr. per month. (big numbers!)
  • Even then, margins of oil marketers should be at least Rs. 2 to Rs. 3 per liter more – and they will earn Rs. 2000 cr. per month, at least, as excess margins.

And then the problem arises: are prices really free? We don’t see competition here, and the government is rejigging things all the time. The OMCs act like a cartel. There’s no real pricing freedom – either the government pushes losses on the OMCs or they decide to earn more profits as a cartel.

Crude prices could fall further, but on some random excuse we won’t see the benefit in lower fuel prices. The lack of clarity in fuel has driven the private retailers out of the business (with the exception of Shell, which doesn’t price much lower than the oil marketers either).

At some point, we should see the governnment privatize at least one of the big OMCs so that we can see real competition. If subsidy ever returns, we should be able to give it to private players as well.


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