Mind the diesel retail-bulk gap

High global diesel prices are straining the finances of government-owned refiners that are selling the fuel to domestic customers at frozen prices. But they are propping up earnings of private refiners that drive major part of India's petroleum exports. The difference between diesel sold to bulk buyers at market-determined prices and through retail outlets has opened considerably to about ₹40 a litre, and there is scope for diversion between market segments. Nayara and Reliance have become proactive about rationing retail sales. IOC, BPCL and HPCL must take the cue to manage surging demand at fuel pumps. With crude oil hovering above $100 a barrel, Indian refiners need to plug leakage into the bulk market to contain under-recovery in retail sales.

The bulk of the under-recovery is borne by PSU refiners that have held retail fuel rates on GoI's prodding. Private refiners maintain a parity with this rate, but they have about a 10% share of diesel sold through fuel pumps. Their share of sales to bulk consumers is considerably higher at 25%. The scope for diversion of private refinery diesel is limited, and if they manage to contain it, they are setting an example for the much larger market supplied by PSU refiners. If the diversion of diesel from retail to bulk segments is localised to PSU-refined diesel, it adds additional load on refiners with relatively low exposure to the buoyant export market.

There are, of course, certain extra constraints on PSU refiners, such as irrigation demand for diesel during an erratic monsoon season. With that out of the way, they could impose daily limits on diesel purchases at fuel pumps. GoI, too, has barred commercial and industrial users from buying diesel from the retail market. India has an advantage in its excess petroleum-refining capacity to tide over the global spike in diesel prices. But it must ensure the market functions efficiently for targeted delivery of fuel subsidies.