The cost of petrol is at a record high in Mumbai, where you can buy a litre now for about Rs 101. In Delhi, the price is approximately Rs 95/litre after the latest hike in petrol rates by the state-run oil marketing companies (OMCs). As prices went through the roof, the Reserve Bank of India (RBI) pitched in with suggestions for reining in the surge. The central bank flagged the taxes levied on fuel by the Centre and the states as the main factor driving the rise in rates.
A COMPLICATED FORMULA
India imports the bulk of the fuel it needs. The price of the crude oil, from which petrol and diesel are obtained, is set internationally by the Organisation of Petroleum Exporting Countries (OPEC). India buys crude oil at the rate decided by OPEC. But even when crude oil prices drop, consumers in India keep paying high prices for petrol and diesel. What explains that?
It is true that India imports crude oil that it then refines before sale at petrol pumps. But the cost of refining and marketing this oil is not what determines fuel prices. Instead, what happens is that the price is set as per a formula called the Trade Parity Pricing (TPP). There is an 80:20 ratio at work. Eighty per cent of the value of the fuel sold in India is tied to the price of the actual fuel, and not crude oil, in international markets while the remaining 20% is per the assumed price if India was exporting this oil.
Sound complicated? It sure is, but critics cite this to point out that the cost of refining and marketing the crude oil in India has nothing to do with the actual price of fuel at pumps.