By Indraneel Pinnamshetty
The Indian government has decided to implement a dynamic auto fuel pricing mechanism from 16th June 2017. India has a standard practice of revising fuel prices every fortnight. With the dynamic pricing mechanism in place, daily price revisions will occur based on international crude oil price movements.
The politics of price
The government has deregulated petrol and diesel prices since 2010 and 2014 respectively. This allows oil marketing companies (OMCs) to decide fuel prices based on international oil prices.
Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp are state-owned enterprises which form 90 percent of Indian OMCs. Due to a majority state ownership in these companies, fuel price determination is influenced by the political leadership of the state. Recently, fuel prices were slashed on 1 April 2017 to appease voters in the five state assembly elections in spite of wide margin fluctuations in international oil prices.
This stranglehold of politics has caused scenarios wherein benefits of reduction in international oil prices have not been passed on to the consumers. With the introduction of a dynamic pricing mechanism, even with continued political interference, the influence on prices will not hold due to the urgency for daily price revision.
What’s in it for us?
Daily price revision is in line with international practices across developed countries. Adopting such a practice will align the Indian fuel retail market with the global oil market.
For consumers, daily price revision is a news to cheer as well as contemplate. With global prices unlikely to change more than few paisa per litre per day, the consumer will be cushioned against a sharp surge in prices, which is often the case in the present 15-day pricing cycle. However, when there is a sudden geopolitical contention, there is also a change in global crude oil prices, which is consequently reflected in local fuel prices.
Dealing with the change
While OMCs are likely to benefit from the daily revision of prices, it is the dealers who will face the brunt of the new system. Not all petrol outlets in the country are automated for an effortless reflection of the revised prices of the day. Such an infrastructural deficit would impose an additional cost on dealers as they will have to employ staff to physically operate pumps during late nights to reflect changes in fuel prices.
Ajay Bansal, the president of All India Petroleum Dealers Association, expressed concerns over the possibility of human errors during manual price changes at petrol pumps. Also, since prices are revised daily, it wont be easy for dealers to predict price patterns. This difficulty will lead to inventory management irregularities and thereby, has the potential to reduce profits for dealers.
A blueprint for the future
Immediate intervention by government to automate all of the 58,000 petrol outlets in India will propel the oil market as there will be a smooth operational flow. From refineries to outlets, without any need for human assistance, an automated process will pacify dealers’ anxiety of increased logistical efforts associated with daily price revision.
Currently, India doesn’t have a policy for independent fuel retailers; unlike the US where Chevron, ExxonMobil and Shell own barely 5 percent of total outlets. A policy for an easy entry of independent players should be on the governments agenda for the growth of competitive oil markets.
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