Time to come clean

In deciding on what petroleum product prices should be, the issue is not whether Finance Minister P Chidambaram’s duty changes for the oil sector were revenue neutral or not, though it is true that this was shown to be so only by excluding the Rs 3,000-odd crore he will get from the increased road cess.

The issue is whether the oil companies should continue to incur notional “losses” (by not being allowed to hike prices in line with global trends) since they are in any case making a comfortable level of profits.

Refinery margins in India are higher than global margins by around a fourth or a fifth, thanks to excessive import duty protection, as shown most clearly by the latest results of Reliance Industries.

But while global oil majors like Shell and Exxon have a pre-tax profit-to-revenue ratio of 15-16 per cent, this is 7-8 per cent in the case of Indian oil majors like IOC and HPCL.

Once you add back the “under-recoveries” of Rs 19,000 crore that these oil majors had to bear last year, their profit margins jump to global levels.

In other words, there is little doubt that Indian oil-refining and -marketing firms need to be allowed to hike prices to global levels.

The next issue is how this burden is to be shared, and whether it should all be passed on to the consumer. This is where the government needs to come clean.

The finance ministry’s gains should exceed comfortably the Rs 3,000 crore that it will get by way of additional road cess, since the calculations of revenue neutrality were made on the basis of Brent prices of $35 a barrel, compared to the current $55.

If this is indeed the case, the finance ministry must come clean on how much extra it collects for each dollar spurt in crude prices, and it should be willing to shed some of the unplanned gain so as to spare the general public a price hike.

That’s not all. While it is true that the oil-marketing companies are not being allowed to charge consumers “international parity” prices, there is more to this story, too.

Around 30 per cent of the crude purchased by the oil-marketing firms is sold to them by ONGC at $4-5 less per barrel than the international price, and this saves them around Rs 4,000 crore.

In other words, when the firms are asking for international parity pricing while selling their products, what they’re not saying is that all their inputs haven’t been paid for at international prices, either.

Similar opacity prevails when it comes to the marketing and other margins charged by the firms. The petroleum ministry needs to come out with the details of how it calculates the under-recoveries.

In short, there has to be greater transparency all round when talking of petro-product products. It will not do to simply keep milking the consumer.