[antz.bin]

Recently, Petrol pricing has been a topic of discussion since another Petrol price hike has been announced by the govt. of India. Since all the members here are affected by these continuous price hikes, I tried to go a bit in depth trying to understand the economics of Fuel pricing and how the government is looting the common man under the pretext of fuel subsidies.

This is a complex matter to understand at first. But as soon as the numbers start flowing in, we will understand the extent to which the government has fallen in order to rob the public under the pretext of 'welfare of the poorest'.

Starting from the basics. We must understand where all this Petrol comes from, How it is produced and distributed.

Firstly On refining and post processing crude oil, the following things come out.



The mathematicians amongst us would try to find faults in this data. So, the following link is for self study for them. The example used is from US. But percentages wouldn't change, would they?

Where Does Our Oil Go? | Mean Green

Short Descriptions for the non-self-explanatory terms:

Refinery losses : Wastage due to things not turning out too well.
Refinery Gain : Volume gained during the refining process due to addition of additives

The current price of 1 Barrel of crude is $93.99. In the interest of overcorrection, I am approximating this to $100/barrel OR Rs. 4900 (as per current FOREX prices).

One barrel is equal to 158.98 liters.

So, per liter cost of unprocessed crude oil is
$100/158.98 = 63 cents OR
Rs. 31/liter. (over-corrected again)


Now considering the Petrol component of this oil.

Considering prices of Petrol in Pune since this price is close to the national average. It is neither the highest nor the lowest price at which Petrol is sold in the country.

Petrol is sold in Pune at Rs. 74.06/liter.
Reducing
Refining cost : Rs.0.60
Transportation charge : Rs.6.00
Dealer Commission : Rs.1.05
Octroi @4% : Rs.2.85

So, the money recieved by 'Govt. owned' Oil Marketing Company before tax.
Rs. 63.56/liter.

Considering the fact that 50.41% of all crude oil imported in the country is sold as petrol, the government sells the Petrol coming out of a Barrel of crude for a total of Rs.5091.25. (which was bought for Rs.4900 for all of it).

Now coming over to the Diesel component

Diesel is sold in Pune at Rs.43.23/liter.
Reducing
Refining cost : Rs.0.80
Transportation charge : Rs.6.00
Dealer Commission : Rs.1.05
Octroi @4% : Rs.1.47

So, the money recieved by 'Govt. owned' Oil Marketing Company before tax.
Rs.33.91/liter. Which is still more than what govt. bought it for (Rs.31).

I wonder why the government was crying foul that the OMCs are making a loss of Rs.6/liter by selling Diesel at current prices.

Since the Diesel component is 22.95% of all produce from Crude oil. That comes to 36.67 liters per barrel which is sold for Rs.1243.61(Pure profit this time)

At this point of time, only 73.36% of all crude oil imported has been sold. And the government has already made a profit of Rs.1434.86/barrel (29.28% profit overall profit. 76% profit on value of product sold.).

It is a known fact that government / OMCs do not give away stuff like Jet Fuel, LPG, Non Jet Aviation Petrol for free and make money in selling all this.


Now coming to the stuff which is supposedly subsidized for the Poor. i.e. Kerosene.


From our table above, we can see that the total component of Kerosene in crude is 0.11%. So, in 1 barrel of crude, just 175.78 ml of kerosene can be separated. The cost of subsidy of this kerosene is Rs.5.39/barrel. Assuming that the Govt. gives away this kerosene to the poor for free (which they actually do.. well almost). The cost of this component is just Rs.5.39/barrel. But since money for this component was already recovered by selling the Petrol and Diesel at astronomical prices, it doesn't cost the govt. any money to give it all away.

Now upscaling this oversimplified calculation into actual numbers.

India imported a total of 14.15 Million Tonnes of Crude in the month of August 2011.

Source: India Aug crude oil imports rise 5.6%, fuel product exports dip - NDTV Profit

This equals to 10,10,71,428 barrels of crude.

So, By selling just the Petrol and Diesel in this imported crude, Govt. made a cool 1,45,02,33,50,000/- (14,502 crores in one month) had it been bought for $100/barrel. But the crude basket for the said month was much below this amount as the crude prices haven't gone over the $100/barrel since April 2011. The govt. also supposedly gave away 2.32 liters of Kerosene / person almost for free. Even though most people in the cities haven't seen even 1 ml of Kerosene for a few years now.

We must understand that the revenues coming from sale of LPG, Jet fuel, Asphalt, Naphta, Petroleum coke has not been included in this aforementioned 'Profit' figure. I have not bifurcated this figure any further as all of it eventually goes to the government in the form of Taxes / Profits for the OMCs. Where, may I ask is the under-recovery, losses and subsidy?

As a side note:
By comparison, have a look at the Totally De-Regulated prices of fuels in Pakistan. (which BTW were reduced on November 1 2011). Which, even though quite high, still seems reasonable in comparison.

Petrol (E10) : INR 49.43/litre
High Speed Diesel : INR 53.41/litre
Light Diesel : INR 46.51/litre

Sources:
Consumer relief: Petrol price reduced by Rs1.5 per litre – The Express Tribune
Welcome to Pakistan State Oil

[ObsessedByFIAT]

:-O is all I can think of!

Purely my thoughts: Till the time we do not have young heads in politics who have an urge to correct what is wrong, I think the country will go to dogs soon ...

[n.devdath]

a very very insightful read indeed. In fact, fuel is cheaper in Bangladesh as well , inspite of being a much poorer country having a much higher percentage of people using kerosene as their basic fuel.

@OBF: Unfortunately, most of these young turks are nothing but rich spoilt foreign educated children of the current politicians who are even better trained to exploit the system and the citizens. A complete change of the leadership and governance might improve things though.

[drmohitg]

A very informative post. Thanks for taking the pain to explain it all in such detail. This is seriously daylight robbery.

Just makes me wonder: What are the independent economists and media people doing? Can't they see the above math? Or is every Media house is just a puppet?

Can't we mail this to some news channel and request them to analyse it?

At best please twitter it and also post the same on FB. Who knows this might just go viral!

[pranava999]

So where's all the surplus money going?? that's the sad fate of our nation the 1000s of crores collected as taxes don't find their way back to development as they should!

[Fordmanchau]

Hey antz.bin,
Appreciate the effort in giving out the details for priving of petroleum products. Obviously Govt. is in profits even though it cries hoarse of the subsidy burden it has to take.
My point is why can't the govt simply deregulate all petroleum products and rationalize the taxes to such extent where it loss of tax is approximately equal to the subsidy burden it has to shoulder(it at all there's any subsidy burden at all). That way we will be relieved of the high taxes, pay market price for the fuel, and at the same time govt. wouldn't have to pay for subsidy. Everybody would be happy. But guess this would unhide the politics govt. is playing with the public here.

BTW just went through the link you gave. Petrol in Pakistan is very costly.

Petrol will now be sold for Rs87.41 per litre compared to the price of Rs88.95 for October.

[antz.bin]

Originally Posted by Fordmanchau

Hey antz.bin,
Appreciate the effort in giving out the details for priving of petroleum products. Obviously Govt. is in profits even though it cries hoarse of the subsidy burden it has to take.
My point is why can't the govt simply deregulate all petroleum products and rationalize the taxes to such extent where it loss of tax is approximately equal to the subsidy burden it has to shoulder(it at all there's any subsidy burden at all). That way we will be relieved of the high taxes, pay market price for the fuel, and at the same time govt. wouldn't have to pay for subsidy. Everybody would be happy. But guess this would unhide the politics govt. is playing with the public here.

BTW just went through the link you gave. Petrol in Pakistan is very costly.

Thats very true. But the above figures you have written are in PKR. The figures I have mentioned have been converted to INR.

[abhibh]

Originally Posted by Fordmanchau

BTW just went through the link you gave. Petrol in Pakistan is very costly.
Petrol will now be sold for Rs87.41 per litre compared to the price of Rs88.95 for October.

That must be in PAK Rs currency (PKR) which comes to INR 49

[Fordmanchau]

^^ yeah got it. The rupee conversion factor came to my mind after I posted, but got lazy to edit. Thanks for the heads-up though. Really appreciate.
The good thing is , they actually reduced petroleum prices after the crude prices lowered. And here, in India, it's just the opposite.

[SPIKE ARRESTOR]

Was wondering if someone could file a RTI on similar front, real figures will be out then. Is that possible? I really do not know.

Spike

[shekaran]

India is Shining !!! Other Countries are laughing at US !!!
Mera Bharat Mahan(s) !!! Gandhi would have died in heart attack if he had read such articles !!!
Unity in Diversity !!! thats why the politicos treat us Gullibiles !!!

only these words come out in my mind after reading and understanding the full article. i had a doubt for long time how (govt)politicians can promise lot of things free, and also do most such things...now i know from where they do the maths, kudos to all politicians for doing the black magic trick !!!

[sids911]

Excellent article antz.bin. Really food of thought.

I do not know the veracity of the numbers that are shown by you neither do i get our govts. inability to control the fuel prices, but I do know if THIS is the extent of our govt looting us then I am sorry, but our country isnt worth living or growing up in.

[funkykar]

What a beautiful analysis this. It sure is an eye opener for many of us who blankly believe in what ever we see is portrayed till now to public.

[srishere]

The beeline of trucks transporting fuel itself is a crime. They not only wasting fuel, they further block roads and cause further waste of fuel. Railways should be used to the maximum. In cochin, near tripunitura, vehicles at times would stay blocked for a long time. Same thing happen on the highway that exits out to tamilnadu.
Excellent article. Thanks.

[vishnurp99]

The initial post was very informative but it seems to be neglecting the huge capital cost which would have been incurred for setting up the refineries/paying salaries and other infrastructure to process the crude oil and then store it. The money for that has to come from the profits of selling petrol.

Also thanks to our great black economy(some say it's bigger than our white economy) taxing fuel is one of the few options that the govt has to get some decent amount of money.