Why the global crude oil crash isn't showing on your petrol bill

NEW DELHI: Indian consumers do not seem to be getting the full benefit of the oil crash.

Domestic rates of diesel and petrol have fallen 7-11% since early October, even as international fuel prices, which determine retail prices in India, are down by a quarter.

Crude oil prices have fallen 32% from the peak of $86.70 a barrel on October 3 to below $60 last week, with global oversupply following Washington’s decision to exempt big buyers of Iranian oil from sanctions and increased production by the US, Russia and Saudi Arabia amid dwindling demand prospects. The Singapore benchmarks for petrol and diesel have fallen 26% and 25%, respectively, in this period.


Oil companies determine the so called gate prices — at which a refiner sells to fuel retailers — by factoring in international rates of a fuels for the trailing fortnight, the prevailing exchange rate plus freight, insurance and some other charges.

To this are added central and state taxes, as well as dealers’ commission, to make the final retail price, which is published daily.

A senior Indian Oil Corp executive said the price fall has globally contracted margins for fuel, mainly petrol, which is now selling for as low as the price of dirty fuel oil, which often sells cheaper than crude oil.

But current retail rates in the domestic market do not seem to reflect this, sparking speculation that Indian refiners may be expanding margins at the cost of retail consumers by selling fuel to dealers at a price much higher than what the domestic price formula should throw up.

A partial explanation for the slower decline in domestic prices is that Indian companies take the trailing 15-day average of international rates to determine their prices, and so the sharp decline of recent days in the international market will fully reflect only after a few days.

There has been a 10% decline in the price at which oil companies sold petrol to pump dealers between October 8 and November 19 (see chart). But in the same period, the benchmark price based on international fuel and exchange rates is down 22%. (State firms release price build-up for fuel rates in Delhi every Monday). Similarly, price to dealers is down just 4.5% for diesel while the benchmark rate has fallen 11.5%.

This means oil companies’ gross marketing margin may have expanded by Rs 4.98 per litre for petrol and Rs 3.03 per litre for diesel between October 8 and November 19.

Company executives admit that margins have expanded but caution that figures deduced from the price build-up charts released by companies may not be accurate as prices are decided by a complex formula.

State companies follow an opaque pricing formula and do not share all details with the public. But in the last four years of free pricing, there have been many instances of companies not following the international price trend and moderating prices, especially during elections and if prices sharply rise or fall in the international market.

Indian Oil, Bharat Petroleum and Hindustan Petroleum control more than 90% of fuel retail sales and set rates for the industry, which also has some private players such as Reliance Industries, Nayara Energy and Shell.