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Wednesday, September 22, 2021

Global-local divide in fuel: OMCs making up for ‘under recoveries’

Industry sources told The Indian Express that Oil Marketing Companies (OMCs) might be withholding part of the benefit from the fall in international prices to compensate for under recoveries during earlier periods.

Written by Karunjit Singh | New Delhi |
Updated: August 21, 2021 7:51:24 am
Covid-19 India Second Wave, fuel, petrol, diesel, petrol prices today, petrol consumption india, diesel prices today, diesel consumption in India, india news, indian expressA worker fills petrol for two wheelers at a fuel station in Ahmedabad. (Express photo by Nirmal Harindran)

While petrol and diesel prices are still at or near record-high levels in the country, international crude oil has fallen 13.9 per cent since the beginning of August.

Industry sources told The Indian Express that Oil Marketing Companies (OMCs) might be withholding part of the benefit from the fall in international prices to compensate for under recoveries during earlier periods. Separately, Finance Minister Nirmala Sitharaman has ruled out reducing Central taxes on petrol and diesel, citing the financial burden of having to pay interest payments on oil bonds issued to OMCs for earlier under recoveries by the Congress-led UPA government.

An unexpected build-up of fuel inventories in the US and concerns about the spread of the Delta variant pushed Brent crude to $65.63 per barrel on Friday (as of 12:30 pm EDT) — its lowest level since May.

“Under recoveries during prior periods, such as state elections when price increases were held back, are likely the reason that OMCs are being slow in passing on the benefit of lower international prices to consumers”, said an official at a public sector OMC. Usually, the full impact of changes to crude oil prices is often seen with a lag as domestic rates are benchmarked to a 15-day rolling average of global prices of petrol and diesel.

Industry sources said the full impact of lower global prices would be felt sooner in diesel than petrol as under recoveries for the former were significantly lower than the latter, and were likely to be recouped soon if the current trend of low prices continues.

Experts noted that with no excise duty cut expected and OMCs withholding part of the benefit of lower international prices, consumers would only benefit from lower fuel prices if crude oil prices continued to remain at lower levels for a sustained period.

Even though the prices of petrol and diesel are deregulated and can be revised daily, OMCs had, in March and April, halted hikes as a number of states went to elections.

OMCs had also held prices constant for over 80 days last year from March 16, as crude fell sharply due to the Covid pandemic. Experts said the decision to hold prices steady, during the period when crude touched lows of around $20 per barrel, led to far higher marketing margins for OMCs during FY21.

OMCs have also held the price of petrol constant for the past 34 days and cut the price of diesel by about 60 paise per litre over the past three days after holding steady for 33 days. Petrol is retailing at Rs 101.8 per litre in the Capital, while diesel is at Rs 89.27.

High crude prices, coupled with elevated taxes on fuel, have led to a 21.7 per cent increase in the pump price of petrol and a 20.8 per cent jump in diesel since the beginning of the year. Elevated taxes on petrol and diesel have also been key contributors to record high prices. Last year, the Centre hiked Central levies by Rs 13 per litre on petrol and Rs 16 on diesel to shore up revenues as Covid caused a sharp fall in economic activity.

“The government wants to ensure that the earnings of OMCs are protected as they are key investors in important infrastructure such as pipelines, new refineries and LPG infrastructure,” said Vivekanand Subbaraman, analyst at Ambit Capital. He added margins for OMCs had been increasing steadily over the past few years as their profits were rising even though their sales volumes had remained relatively stable.

Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd did not respond to emailed requests for comment.

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