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Wednesday, May 27, 2020

OMCs may see higher margins; little benefit for consumers from low oil prices since Jan

The Centre’s move to hike excise duty on petrol by Rs 10 per litre and on diesel by Rs 13 per litre has not resulted in any hike in pump prices as the duty increase has been absorbed by OMCs.

Written by Karunjit Singh | New Delhi | Updated: May 7, 2020 1:56:51 am
Total excise duty of Rs 32.98 per litre on petrol and Rs 31.83 per litre on diesel are up 65 per cent and 101 per cent, respectively, from total excise duty on petrol and diesel at the beginning of the year. (Express Photograph by Tashi Tobgyal)

The government has hiked excise duty on petrol and diesel to shore up revenues and increase margins for oil marketing companies (OMCs), limiting the benefit of lower international crude prices for consumers. This has been a steady trend, despite the retail price of diesel being decontrolled in 2014 and the price of petrol being decontrolled in 2010. The Centre, however, had also cut excise duties and reduced margins of OMCs when international prices shot up in 2017-18.

The Centre’s move to hike excise duty on petrol by Rs 10 per litre and on diesel by Rs 13 per litre has not resulted in any hike in pump prices as the duty increase has been absorbed by OMCs. But experts say that even after absorbing the excise duty hike, OMCs will continue to make above long-term average margins on petrol and diesel. The retail price of petrol has fallen by only 5.2 per cent and that of diesel has moved up by 2 per cent in the Capital since the beginning of the year, even as global crude prices have fallen 53.6 per cent to $30.76 per barrel.

Total excise duty of Rs 32.98 per litre on petrol and Rs 31.83 per litre on diesel are up 65 per cent and 101 per cent, respectively, from total excise duty on petrol and diesel at the beginning of the year.

The government did, however, also cut excise duty twice by a total of Rs 3.5 per litre on both petrol and diesel in FY2017-18 as international crude prices rose to upwards of $80 per barrel.

A report by CARE Ratings said that levies by both the Centre and states combined is around 260 per cent of the base price of petrol and 256 per cent of the base price of diesel as taxes in the case of the national Capital. “Time and again the government has not passed on the benefit of low oil prices to consumers as this is the second time since March 2020 that the government has raised the excise duty on petrol and diesel even as oil prices are at its lowest,” said the agency in a report.

Experts told The Indian Express that even after absorbing the excise duty hike, OMCs would still receive above long-term average margins on the sale of diesel and petrol because of historically low crude oil prices. “Since OMCs had not cut petrol prices since mid-March, this was leading to super normal margins of Rs 18 per litre on diesel and Rs 20 per litre on petrol,” said Abhijeet Bora, senior analyst at Sharekhan by BNP Paribas.

He added that even post the excise duty hike, OMCs would have a margin of Rs 5 per litre on diesel and Rs 10 per litre on petrol, significantly higher than historical normative margins of Rs 3-4 per litre.

Bora also said that the super normal margins would have allowed OMCs to make up for some of the fall in sales volumes due to the lockdown, which has been estimated as a 60-70 per cent fall in sales volumes. He added that current margins would boost the earnings momentum for OMCs in Q1 of FY21, as the government lifts restrictions on movement across the country.

Sources at leading OMCs also told The Indian Express that demand for petrol and diesel had improved since April 15 when the government started easing restrictions on movement in some parts of the country.

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