Thursday, January 10, 2008

Are petrol prices in India cheap??

($1 = Rs.39, approximately)

Recently, I had been going through a number of articles in Indian media, claiming that oil companies are losing Rs.9/liter of petrol due to global oil price rise. The reports seem to convey the message that Indian motorists are somehow paying very low than what they should. Reality is otherwise, as I noted in one of the earlier articles here.

Indian motorists pay around Rs.52/liter ($1.3/liter or around $4.93/gallon). Do you think this is subsidized and cheap?? See what India's peers in far more wealtheir nations with greater purchasing power pay in I think the petrol subsidy debate is misguided, because of the absence of discussion of taxes. Are Indians paying less for Petrol than we living in the US? I fill my tank at $3.2/gallon (before getting 5% cashback with my credicard) because my state of washington has one of the highest sales taxes, but it is still equivalent approximately Rs.30/liter which is half what an Indian motorist pays in India. Does it mean 76, Chevron and other places where I fill gasoline from are making losses?? Looking at their stock prices doesn't make me think so. US oil companies are having windfall profits.

And Indian purchase basket of crude is about 8 dollars cheaper per barrel than international price and Indian refineries are more efficient. So, shouldn't Indian motorist deserve a much lower gas/petrol price than us in the US? So ideally the petrol prices could be in Rs.20s per liter and still the companies coulde make profits and government to earn taxes, if US prices are a guide.

Basically, Indian governments at various levels tax petrol and gain over Rs.35/liter and at the end they claim they are losing Rs.9/liter due to subsidies. With proper math, it would come to Indian government gaining Rs.25+/liter on petrol, after taking up a loss of Rs.9 loss per liter given to oil companies in bonds and other forms of subsidies. Simple. So, nobody is doing charity in India with petrol. Its just that government has odd tax policies that end up taxing much more than required and in the end share a part of spoils with oil companies by taking their losses.

For Diesel and LPG, if you factor out the taxes the government breaks even and only on Kerosene the government, loses overall. But, eventually the hope is that more of rural people would be moved to LPG. And since Diesel is more efficient and used mainly for public transportation there is a better rationale for selling it cheap. For LPG and Kerosene the rationale is that India should have its priority of moving people from highly polluting wood, cowdung and other materials that are burnt in rural places for cooking. So, having it cheap makes sense, though eventually I would prefer Kerosene to go around Rs.25/liter that would break even for the government at the current $100/bbl global prices.

I would prefer a more transparent mechansism in which government strips all its taxes - from excise duty to sales taxes on petrol and diesel, along with subsidies for marketing companies, align the prices to vary daily with global prices and then over it add some minor taxes that can vary based on international prices. This will be pretty transparent and allow people to see how much of the price rise is due to interntional prices and how much is due to their government, and unless the oil prices goes to extremes the government should not meddle with the prices. So, a gas filler can see his Rs.52 payment for a liter is due to Rs.25 for Saudi Arabia/OPEC, Rs.5 for refining and transportation cost, and Rs. 20 for government taxes, and the rest for the profit of the oil marketing company. Same with all other petroleum products and it will remove politics from pricing, and only simple economics will rule.

Here is one chart of global and Indian petrol prices in 2006:

HEre is another slightly older (2005) prices of gasoline around the world:

Again India was just below the European countries and much ahead of rest of the world in its prices.


Anonymous said...

All jumbled, confused, and clear as mud, my dear Sir!

Anonymous said...

Your thoughts and understanding of the subject matter is crystal clear!! But the Indian Govt does not work in a manner of honesty when it comes to money..

shankar said...

Hi dude..I was just looking for the reasons why oil prices have not gone up drastically in india and i happen to hit your site.Well correct if am wrong..A barrel of oil = 42 gallons = 42*3.785 = 159 litres
And I read somewhere you can only produce 19.4 gallons of gas...+ some other oils (kerosene..asphalt..lubricants etc)Lets consider its equivalent to 25 gallons of gas approx 95 litres..
current price 124*42 = 5208 + Transport + Processing cost + tax approx 6000
even then it turns out to be 63rs..Does this not mean that the oil companies are losing on every litre?

Anonymous said...

Yes. Petrol prices in India are really cheap. The Indian oil and gas companies make "windfall" profits. Look at HP, BP, RelPetro and so on. There are government subsidies on Petrol in US which causes lower prices. If higher taxes are imposed on gas companies they will charge the same from customers. It is unfair to compare the gas prices in 2 countries. Look at gas prices in Middle east where it is still cheaper than water. Decide yourself.

Anonymous said...

hi evry1
i would say ur blog was good enough
and i will appriciate ur deep study
bt let me tell everyone that its not dat oil companies in india are making any benefit or govt. of india making so but its India's fortune ...
1)companies r getting loss 9/lt is correct.
there many other loses. tell me all the companies are making there pumps giving international facilities. no one pays them for that
if u see the profits of oil companies in india, u r not seein profit due to only sale of petroleum products but also due to investment in market
market investments(share market)
f1 nd A1 racing programs and other investments in difft. other companies
LUBRICANT (engine oil,brakeoil,gear oil ,etc)
So, companies are having loss due to petroleum sales and facilities but profits due other ways.

2)To let me tell & remind
Indian govt. is bound to impose such a high tax on petroleum products because 59% of interest paid to world bank loans comes from these taxes on petroleums..
if these will be redused how will india pay back to world bank..???

3)coming to da point of sudden increase this is govt fault.
oil companies get rs 9\Lt. subsidy from govt through subsidy bonds.
This govt had not issued these subsidy bonds from oct2007 to the oil companies.
the rules says subsidy bond should be issued within 45 days ..
This was the main reason oil companies had to make pressure on govt .

can u tell me hw much is india in debt to world bank not thousands but lacs of crores ..
can u tell me any udr way india can pay off these loans(udr than 40yrs old way)..???

I have many udr points which can state hw public is self responsible for everything but due to shortage of time i cant discuss.

moreover i dont want to bore any1 in a single strike ...:D:D:D hehe

guys v have to change nd shuld nt sit waitin udrs to change ...

Archit Jindal

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