04 May 2017 14:42:25 IST

Daily pricing of petrol and diesel heralds dynamic change

By enabling quick pass-through to customers, this will benefit retailers when fuel prices rise

Filling up your tank in Puducherry, Visakhapatnam, Udaipur, Jamshedpur or Chandigarh? You will be paying a different price each day. Since May 1, the PSU oil marketing companies — Indian Oil, HPCL and BPCL — have been changing petrol and diesel prices in these cities on a daily basis.

This ‘dynamic’ daily pricing, initially being implemented on a pilot basis in these select cities, is a shift away from the fortnightly pricing mechanism for petrol and diesel, which has been the practice so far. At present, the prices of these two key transportation fuels are being revised on the 1st and 16th of every month, based on average international prices and currency rates in the preceding fortnight. If the experiment in the five cities is successful, daily pricing for these fuels could be rolled out across the country.

Daily pricing of fuels is not a new concept — it has been around in many international markets for long. By enabling almost immediate pass-through to customers, the mechanism will benefit fuel retailers when fuel prices are on the rise. Sure, customers will have to pay more in this case, but the psychological impact will be cushioned since the daily price hike will likely be just a few paise per litre, far lower than the few rupees increase seen in rising markets under the fortnightly pricing mechanism.

And when fuel prices are on the decline, customers stand to benefit from daily pricing, thanks to immediate pass-through of the benefit. For instance, on May 1, petrol and diesel prices in Puducherry were fixed at ₹66.02 a litre and ₹58.68 a litre, respectively, lower than the ₹66.71 and ₹58.69 on the previous day.

While daily fuel pricing is more dynamic than fortnightly pricing, there are concerns. It still remains to be seen whether the vast dealer network across the country (close to 60,000 outlets) is equipped to handle the change technologically on an automated basis. It may not be possible to effect daily price changes at the outlets manually. Reports suggest that about 40,000 outlets are automated, and even in many of these cases, a lack of proper network connectivity could be a problem in effecting daily revisions.

Pricing methodology

Besides, the way fuels are priced in the country itself warrants a re-look. The price of petrol and diesel in the country is not determined by the actual costs incurred on crude oil sourcing, refining and marketing. Rather, a formula — trade parity price (TPP) — is the starting point for pricing these products. TPP is the weighted average of import parity price (IPP) and export parity price (EPP) with weights of 80 and 20 respectively.

IPP is the price importers would pay in case of actual import of the product at Indian ports, while EPP is the price oil companies would realise on export of the product. In short, the pricing assumes that 80 per cent of the petrol and diesel is imported and 20 per cent is exported. Essentially, the TPP is determined based on prices for these products prevailing in the international market.

Now, while India imports more than three-fourth of its crude oil requirement, it is self-sufficient in refining. In fact, with surplus capacity, the country is a net exporter of several petro-products, including petrol and diesel. Yet, the pricing assumes that 80 per cent of petrol and diesel are imported.

The IPP includes costs such as free-on-board price, ocean freight, insurance, Customs duties and port dues. EPP, which accounts for the assumed 20 per cent exports, considers free-on-board price. The TPP, which is quoted in dollars, is converted to rupees. To this is added the cost of inland freight, marketing costs and margins charged by the oil companies, the dealer commission and, finally, the plethora of taxes levied by the Central and State governments.

Outdated method

TPP may have had some economic rationale earlier, when petrol and diesel prices were controlled by the government and oil companies needed the comfort of buffer pricing. But with prices having been decontrolled over the past few years, an actual costs-plus-profit approach seems more appropriate than TPP.

The refiners will likely have different cost structures, based on their crude sourcing and refining capacities and capabilities. They should be encouraged to price their products independently and transparently based on market principles. This could translate into lower costs for customers.

This key change should help address the problem of near-same pricing by the three PSU oil marketing companies that dominate fuel retailing in the country. For instance, a litre of petrol in Delhi today is sold at ₹68.09 by Indian Oil, not much different from the ₹68.17 by BPCL and ₹68.28 by HPCL. The uncanny congruity in prices has often sparked allegations of cartelisation.

Truly ‘dynamic’ fuel pricing should not only mean more frequent resets, but also true competition among fuel retailers, based on cost efficiencies, to give customers more choice.