Falling crude puts OMC pricing under scanner

Falling crude puts OMC pricing under scanner

News:

1. Recently the Centre slashed excise duty on petrol and diesel to lower pump prices as global crude surged to a four-year record.

Important Facts:

2. The article discusses whether the oil marketing companies have recovered after this price cut and absorbed into their financials.
3. The OMCs had said that the total effect of price cut on their finances would amount to ₹4,000-₹5,000 crore in this financial year.
4. Anomaly: The Indian basket of crude oil has seen prices fall almost 24% in one month after the price cut, whereas the price of petrol has fallen only 8.8% during that period.
5. Reasons for disparity in oil prices: While there will be a reduction in fuel prices if oil prices reduce, it won’t be by the same percentage.

• The crude is a part of the supply chain of which consists of shipping, refining, supply and distribution, etc and are relatively fixed costs that do not vary with the price of oil.
• These various components in pricing add to the opacity behind how the final retail price is determined.
• For example, if the global price is $65 per barrel, then there are transportation costs, cross-subsidy losses, handling losses, export parity price, dealercommission, and then taxes added to this.
• Moreover, the international products, whose basket we use for pricing petrol products, do not move immediately and in tandem with the crude oil prices as there can be a lag.
• Arbitrages also change and the price stack up also includes in-land costs, over and above international products prices.
• The OMCs also bear costs including dealers’ commission.”