Govt plans to devise a new oil pricing formula

NEW DELHI: The government plans to devise and publicly share a new pricing formula for key auto fuels, looking to inject greater transparency into an arcane system of price-setting amid hopes it will draw greater private participation in the state-dominated fuel retailing sector.

The proposed new formula will also contain an in-built mechanism to freeze pump prices of petrol and diesel if global oil prices rise beyond a certain level to protect consumers, a senior government official told ET.

The finance ministry has in a note proposed creating a software that will dynamically calculate retail prices of fuel, factoring in variables such as global prices of crude, the exchange rate and tax rates prevailing at any given time.

“The formula-based pricing system would bring automatic changes in auto fuel prices without any government intervention,” the official added. The finance ministry is of the opinion that the formula would also be acceptable to private players such as Reliance and Essar and incentivise them to expand their fuel retailing operations, and the
increased competition could help kep prices under check.

The transparent system will help these firms effectively compete with state-run oil companies, which operate more than 90% of the nearly 40,000 petrol pumps in the country.

“Private oil companies may accept a formula-based pricing mechanism if, for each international price rise, the rise in the domestic price is stated clearly and in advance,” says the note circulated to top decision makers in the government. The note also mentions a system of predictable retail price variations in case there is a large rise in global oil prices.

“If the global price rises very high, since we will not fully raise the domestic price cap, private players will make a loss at such times. But if we make it clear in advance that we shall do this only if the price goes really very high, many private firms will take the gamble and come in,” it said.

The finance ministry is confident that the proposed mechanism will attract private firms, bring in competition and keep a lid on retail prices.

“What is currently called the market price in India is not really the market price but the price at which the existing public sector firms do not incur a loss. Indeed, if there were more private players —- we would (not) have had to raise petrol prices by Rs 3.50 (a litre),” the note said, referring to increase in the price of petrol that accompanied the government’s decision last month to set market determined prices for auto fuels.

“Even with a Rs 2 (a litre) rise a private firm, with its greater efficiency, could turn in a profit,” the note added. On June 25, while freeing petrol and diesel prices, the government had said that it could step in to protect consumers from sharp spikes in global crude prices.

It is working out a pricing mechanism including frequency of price revisions and the level of global crude price beyond which it would control retail prices of auto fuel.

The finance ministry is in favour of initially revising auto fuel prices every two weeks before moving to a weekly system.

The partial deregulation was announced at a time when India’s average global crude oil import price based on a basket of crude oil grades was around $74.84 a barrel. The average crude oil import price now is $71.11 a barrel, indicating room for a downward revision in petrol and diesel prices.