Crude facts about crude oil

The common man in Bharat feels whenever the global crude oil prices have declined substantially the retail prices of petrol and diesel have not got reduced. Common man‘s thinking is quite understandable but the petrol and diesel pricing is not so simple as it involves a complex mechanism. 

Crude oil imported by Bharat is processed in the refineries and converted into petrol and diesel. The import cost of crude is based on both the crude oil prices and dollar to rupee exchange rate.  In normal course, every 1$ decrease in crude prices should lead to an effective reduction by Rs 0.50/ litre. But most of the times this expected gains in crude oil price reduction is offset by the appreciating dollar value against INR. This could be demonstrated by the following charts.

Table: I

Year  Average crude price in Dollars / barrel in Global Market
2014-15 52.32
2015-16 43.67
2016-17 54.25
2017-18 71.34
2018-19 64.30
2019-20 41.96

(Source-www.statista.com)

Table: II

Financial year Indian basket of crude oil ($/bbl) Import of crude oil (‘000 Metric tonnes)
2014-15 84.20 189435
2015-16 46.17 202850
2016-17 47.56 213932
2017-18 56.43 220433
2018-19 69.88 226498
2019-20 60.47 226955

Indian basket of Crude Oil represents a derived basket comprising of Sour grade (Oman and Dubai average) and Sweet grade (Brent Dated) of Crude oil processed in Indian refineries.

(Source- pib.gov.in and petroleum.nic.in)

Table: III

$ to INR yearly average exchange rate 

Year  USD to INR Exchange rate (yearly average)
2014-15 61.14
2015-16 65.47
2016-17 67.07
2017-18 64.45
2018-19 69.92
2019-20 70.90

(Source- rbidocs.rbi.org.in

Table: I consists of average crude price in dollars in the global market. Table: II contains Indian basket of crude oil price in $/ bbl. This Indian Crude Basket, is a weighted average of Dubai and Oman (sour) and the Brent Crude (sweetcrude oil prices.  It is used as an indicator of the price of crude imports in Bharat and Government of Bharat goes by this index when examining domestic fuel price issues.

Table: III contains the $ to INR yearly average exchange rate. One has to apply this $ to INR exchange rate to arrive at the rupee cost of crude oil imported by converting the dollar price of crude imported into rupees. 

Based on the above data the average cost of crude oil for the period 2014-15 to 2019-20 would be as under: 

Table: IV

Year  Average cost of crude oil per litre (INR)
2014-15 32.38
2015-16 19.01
2016-17 20.06
2017-18 22.87
2018-19 30.73
2019-20 26.96

(Average cost of crude oil per litre = Indian basket of crude oil ($/bbl) x USD to INR Exchange rate (yearly average) / 159 litres. 1 barrel is equal to 159 litres.)

One can observe that the average crude oil price substantially decreased from $ 52.32 /bbl in 2014-15 to $ 41.96 /bbl in 2019-20 in global market and also the Indian basket of crude oil price which too substantially decreased from $ 84.20/bbl in 2014-15 to $ 60.47/bbl in 2019-20 but the average cost of crude oil per litre is found to decrease from INR 32.38 in 2014-15 to INR 26.96 in 2019-20 wherein the reduction is only Rs 5.42 and not very significant compared to the decrease in the Indian basket crude oil prices in dollar terms.

We lost an opportunity to gain another Rs 6.45 in the average cost of crude oil due to the USD to INR exchange rate moving from Rs 61.14 in 2014-15 to Rs 70.90 in 2019-20 making the import of crude costlier in rupee terms. 

Therefore, even though the crude oil prices decline unless the $ to INR exchange rate either remains stable or the dollar currency depreciates, the cost of crude oil when converted from dollars to rupees will not effectively come down.

Historically dollar has appreciated against rupee (Table: III) in the long run (though there could some marginal depreciation of dollar against rupee occasionally) and this is the reason behind the rupee cost of Bharat’s crude oil imports not getting reduced significantly though the global crude oil prices have declined considerably.    

Consequent to the introduction of dynamic fuel pricing policy in June, 2017 the petrol and diesel  daily retail rates are now decided based on the international market prices of crude oil and foreign exchange rates (i.e., $ to INR exchange rate). 

Price Buildup of Petrol at Delhi effective 16-Feb-21

Table: V

Elements  Unit Delhi
Base Price  Rs/Ltr 31.82 
Freight etc Rs/Ltr   0.28
Price charged to dealers ( excluding Excise Duty and VAT)  Rs/Ltr 32.10
Add: Excise Duty Rs/Ltr 32.90
Add: Dealer Commission (Average)  Rs/Ltr   3.68
Add:VAT (including VAT on Dealer Commission)  Rs/Ltr 20.61
Retail Selling Price at Delhi  Rs/Ltr 89.29

(Source- iocl.com)

Price Buildup of Diesel at Delhi effective 16-Feb-21

Table: VI

Elements  Unit Delhi
Base Price  Rs/Ltr 33.46
Freight etc Rs/Ltr   0.25
Price charged to dealers ( excluding Excise Duty and VAT)  Rs/Ltr 33.71
Add: Excise Duty Rs/Ltr 31.80
Add: Dealer Commission (Average)  Rs/Ltr   2.51
Add:VAT (including VAT on Dealer Commission)  Rs/Ltr 11.68
Retail Selling Price at Delhi  Rs/Ltr 79.70

(Source- iocl.com)

The processing cost of refineries and their margins plus margins of OMCs (Oil Marketing Companies) are loaded in the Base Price mentioned above. 

If one looks at the excise duty levied on petrol and diesel it can be noticed as under:

Table: VII

November, 2014 December, 2017 January, 2021 
Excise duty on petrol  Rs.9.20/ litre  Rs.21.48/litre Rs.32.98 /litre (including road cess) 
Excise duty on Diesel  Rs.3.46/litre Rs.17.33/litre Rs.31.83 /litre( including road cess) 

Excise duty on petrol is increased by 258.48% between November, 2014 and January, 2021. Excise duty on diesel is increased by 819.94% during the same period. The detailed breakup of the excise duty on petrol levied by the centre is as under.

Table: VIII

Basis Excise duty Special additional excise duty Road tax  Total (INR)
Petrol  2.98 12 18 32.98
Diesel  4.83 9 18 31.83

In budget 2021-22 the Finance Minister has imposed Rs 2.5 per litre agri cess on petrol and Rs 4 per litre on diesel. But this was offset by an equivalent reduction in excise duty so that there is no additional burden to the people. Accordingly the new structure of excise duty effective from 1st April, 2021 is likely to be as under.

Table: IX

Basis Excise duty Special additional excise duty Road tax  Total (INR)
Petrol  1.48 11 20.50 32.98
Diesel  1.83 8 22.00 31.83

Though the tax payers are not affected by the above changes, the states will tend to lose their share of revenues from the central taxes since the proposed agri cess on petrol and diesel of Rs 2.5 per litre and Rs 4 per litre respectively will be adjusted from the centre’s excise duty on petrol and diesel which come under the central taxes portfolio. 

VAT levied on petrol and diesel by the states is on ad valorem basis which increases when the base price of petroleum increases and decreases when the base price reduces. Whereas the excise duty levied by the centre on petrol and diesel (i.e., both basic excise duty and special additional excise duty) is specific duty which is fixed per litre of petrol and diesel but not on their basic prices.  

Tax on petroleum is 2% of GDP in the last decade.  Excise duty on petroleum alone is 85%-90% of all excise collections of the centre. It is 24% of indirect tax (GST) revenue in 2018-19.  Excise revenue  from petrol and diesel increased by over 94 percent from about Rs 1.72 lakh crores to about Rs 3.34 lakh crores from 2014-15 to 2019-2020 for the Union Government.

For the State Governments the increase in VAT revenue was about 37 percent from Rs 1.60 lakh crores to Rs 2.21 lakh crores during the same period. 

Oil Bonds

During the period 2005-2010 the then central government issued special securities to oil market companies in lieu of cash subsidy to the tune of Rs.1.40 lakh crores. The repayment of these oil bonds was made on maturity Rs 5,763 crores in 2012 and Rs 3,500 crores in 2015. The balance amount of Rs 1.31 lakh crores will fall due for payment during the period October, 2021 to March, 2026.

Through this mechanism the then government avoided the fuel price increase but ultimately when these bonds are paid on maturity that will create a burden to the government’s exchequer and increase in the taxes in one form or another to absorb this burden would be inevitable. 

The fact remains that whether it is dynamic pricing mechanism of the current government or subsidies to the OMCs by the earlier regime, in the end it is the consumer who has to pay this in one form or another. As the finances of both the centre and the states are not in good shape and they are majorly depending on the taxes from petrol and diesel it is most unlikely that they will reduce these taxes significantly, though a symbolic reduction every now and then is quite possible. 

In 2015 the government set a target to decrease the oil import by 10% by 2022. In 2015, Bharat was importing 78.6% of its total oil requirement. 

Bharat’s domestic crude oil production:

Table: X

Year  Crude oil production (‘000 tonnes)  % Growth 
2013-14 37,788
2014-15 37,461 (0.86)
2015-16 36,950 (1.36)
2016-17 36,008 (2.54)
2017-18 35,684 (0.89)
2018-19 34,203 (4.15)
2019-20 32,173  (5.93)

(Source- MoPNG, quoted in energy.economictimes.indiatimes.com

While the domestic crude oil production has come down during 2013-14 to 2019-20 as indicated in the above Table X , the crude oil imports have been increasing during the same period (Table: II).

Therefore, the only option available is to step up the efforts in production of renewable energy, switch over to the electric vehicles in the near future and build mass public transport systems in all major cities in the country. There is a need to work on R&D to enhance the battery life and reduce the battery replacement cost for electric vehicles so that they are cheaper than the petrol and diesel vehicles in the long run.

Let us hope the government and the policy makers will seriously work to evolve a long term strategy with an integrated approach to address this burning issue.  

Reference-

  1. https://www.orfonline.org/expert-speak/indias-tax-revenue-from-petroleum-products/
  2. https://www.freepressjournal.in/business/petrol-and-diesel-prices-in-india-between-2014-and-2020-india-saw-a-10x-rise-in-excise-duty-in-diesel-prices-check-latest-prices-in-mumbai-and-delhi)

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About the Author

Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]