From Crude Oil market to the Petrol Pump...

Readers will be well aware that crude oil prices have tanked in the last 2 months....domestic prices at the petrol pump level have also declined.

But I came across several question marks as to whether the complete pass through of the falling crude oil prices has happened to the retail petrol pump level in India. It is natural for any layman to ask these question particularly given that crashing crude is in media focus and thus awareness levels are reasonably high.

Having said that I also think some of these questions are loaded with incorrect and incomplete data...and thus could be just plain illogical question or are an attempt to give it a certain mischievous colour to INTENTIONALLY mislead people, when actually it should just be simple mathematics.

So while I am no expert on the matter, I thought it's worthwhile to put things in perspective, for the layman. Attempt is to have a rough guideline to understand how retail pricing works in conjunction with international crude prices, whether going up or down.

Will try to keep it as "layman" as possible.

(If anyone who reads this and has better understanding, pls correct/add/modify)

- When comparing Dollar prices of crude oil across timeframes...please do look at the changes that have happened in the exchange rate for USD to INR, in the same timeframe. Indian Rupee price of crude oil is what we end up paying for. Difference caused can be huge, when USDINR moves from 44 to 62, even if the Dollar price is the same. After all, it's (CRUDE IN $ multiplied by USDINR rate).

- TIMING DIFFERENCE. This becomes VERY IMPORTANT in the present context of crashing oil prices. Retail prices are changed, mostly, on fortnightly basis. The price for a forthcoming fortnight is decided on the average crude price of the preceding fortnight. 

Thus, as an example, the pricing for, say, 1-15 Dec 2014 will be based on average pricing of the 16-30 Nov 2014 fortnight.

As this is being posted, pricing for first fortnight of Dec 2014 is 76$. Thus while TV screens are flashing crude oil price in low $60s, it will get reflected in the Indian crude basket price a little later. And correspondingly retail price will also change later.

- Retail prices of some petro products have only recently started to become market price linked. Before this almost all products were subject to Govt controls and thus could involve subsidy elements and under recoveries. 

When one says there is under recovery of Rs 2 per litre on petrol, that means price of petrol at the pump is Rs 2 lower than what it should be to recover costs.

So when you compare prices across years, if there was any under recovery or subsidy element involved, it needs adjustment for comparison.

Example: If I say crude oil price in 2009 was 70$ and petrol price was, say, 57 Rs. Why is it 70 Rs now with crude oil at the same price in $. As mentioned above, first adjustment for currency has to be done. 

But if in 2009, there was an under recovery, say, 5 Rs. Then actually price then in 2009 should have been 62 Rs and not 57 Rs. And thus comparison between 70 and 57 is incorrect. It should be between 62 and 70.

Under recovery might have been zero as well, am just saying it needs to be taken into consideration before reaching a conclusion.

- Products like petrol and diesel are taxed at various levels, Central and local. And they may vary state to state. And thus prices vary from city to city.

Thus when prices are compared, it will be useful to check whether prices being compared are from the same city.

Taxes add another angle, which is they can be changed, mostly upwards.

And thus prices can move even while crude has not!! And thus taxes also need to be compared while comparing retail pump prices.

- Dealer margins and logistics cost also change with time. But they form part of the price that is paid at the pump. That also need to be compared.

Big chunk of taxes, dealer margins, logistics cost etc are fixed in nature...and thus they do not go down even when the basic petrol price (before taxes and margins) goes down. Thus the basic price of petrol will broadly follow crude oil price, but other components of retail price don't move (taxes can, in fact, go up).

That's why, mathematically, percentage drop in retail petrol/diesel price doesn't match percentage drop in crude oil price even if drop in crude oil price is completely passed into the basic petrol price.

One can complain about taxes, but that's been a constant feature of petroleum sector for decades, unlikely to change.

So has recent crude oil price crash been completely passed on to retail prices?

As noticed above, present pricing is with average of 76$, so as that average goes down, prices should change.

Till date, by my rough calculation, basic petrol price ( at 76$) may have roughly come down by 15 Rs, but retail price has come down by around Rs 11.

The remaining has been kept by Govt by increasing Excise Duty.

That's the rough break up of how the advantage of lower crude price has been shared between consumers and Govt, as of now.

What happens in future is anybody's guess.