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Friday, July 30, 2021

Doing the math on fuel prices

The high price of petrol is almost solely due to the government wanting to increase its revenues. Producers of oil need incentives to ramp up production, which is the reverse of what is happening at the ground level.

Updated: June 29, 2021 8:07:44 pm
Fuel pricesA litre of petrol retails at close to Rs 95 in New Delhi in which the VAT and excise duty content aggregate Rs 55 per litre. (File photo)

Written by Subramaniam R Iyer

I am a 63-year-old accountant and have lived in South Delhi for decades. My dear friend Rajeev is an engineer who resides in my colony. He does not like walking but, unlike him, I love to walk every day. My grouse is that there are no pavements in colonies that sustain walking. One cannot walk for more than a few steps on a pavement if there is one, without having to walk around a parked car, potted plants, or some random barricade. The pedestrian, therefore, has to jostle for “safe” space on the tarred roads with speeding vehicles.

Rajeev’s solution is that everyone with cars must stop walking in the colony and take to driving. My counter to this, with thoughts on clean air and parking shortage and walking for health, are put into the usual “you grumble” bucket.

I decided to do a little math with Rajeev. Driving costs about Rs 12 per kilometre these days with fuel retailing at around Rs 95 per litre for anyone owning a fuel-friendly air-conditioned sedan, including maintenance and insurance. I am excluding the steep traffic challans that one has to pay at times to appease overzealous cops, who refuse to believe that I am a white-haired man who drives sparingly and never speeds.

On my statement that petrol price increases were unwarranted, Rajeev turned patriotic. He believed that the Government of India (GOI) could do little in the matter as India imports 85 per cent of its crude oil needs. I retorted sharply that the government takes too much out as revenue for itself from the retail price of petrol, and decided to clarify a few aspects.

A number of companies went into oil production in the 1990s when the GOI allotted smaller fields to them. They paid royalty and cess and shared the profit from petroleum with the GOI as per their Production Sharing Contracts (PSCs) with the latter.

Besides, these companies also paid income tax on profits while bearing all the financial burden of development and drilling wells in the fields. The contracts were generally issued for 25 years. In 2019-2020, the contracts were renewed as per a new policy that the GOI had introduced. The renewal of the PSCs saw a very substantial increase in the royalty and cess and profit petroleum payable by the operators for the same fields, where production levels had started declining as they are wont to do after years of production.

Today, very broadly, this is how the cost is factored in (these are all estimates based roughly on current market trends using average numbers only) :

A barrel of crude oil has 159 litres, which after refining gives the equivalent of 130 litres of retail petrol that metro dwellers fill in their motor vehicles. Assuming an average cost of $60 per barrel and an exchange rate of Rs 72 to one US dollar, this works out to Rs 4,320 per barrel. Thus, the cost per litre of crude oil to the refinery is Rs 33.23. Domestic producers of oil, I may clarify, are paid by the GOI at average international price.

A litre of petrol retails at close to Rs 95 in New Delhi in which the VAT and excise duty content aggregate Rs 55 per litre.

The oil field operators pay the GOI roughly the following after the new policy and PSCs renewals:

If one also adds income tax also to the revenue of GOI from the oil fields, the GOI receives almost Rs 69 to Rs 70 per litre of petrol sold (from domestic production) which is over 72 per cent of the retail price.

The loss of potential GST set off on input services by the oil field operators for their drilling and other services is a significantly huge source of revenue to the GOI as petrol and gas continue to remain under the VAT regime. Producers of oil need incentives to ramp up production, which is the reverse of what is happening at the ground level.

Come to think of it, I remarked, “this is probably the reason that decent uninterrupted pavements for inhabitants to walk on or good cycling tracks remain non-existent. It is all about the revenue inflow from the sale of cars and petrol as a corollary!”

Rajeev responded sharply that I seemed to have forgotten the great pavements in Lutyens Delhi and the India Gate lawns. I reminded him that allegedly the lawns at India Gate lawns were being decimated by new buildings and that the GOI is spending some Rs 20,000 crores on this project. Rajeev replied, “Don’t complain. Possibly the GOI master plan is to finance this from the sale of petrol.”

 The writer is a financial consultant based in New Delhi and founder of Amtrak Consultants


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