After complete deregulation of Petrol prices in 2010 and Diesel prices in 2014 by the government, the oil marketing companies (OMCs) were allowed to determine fuel prices according to the market conditions. In other words, fuel pricing was freed completely from government regulation.
Supply and Demand conditions of the market and changes in international oil prices were, from then onwards, to be the determinants for deciding the prices. Another feature pertaining to fuel pricing was the fortnightly pricing system which was adopted in April 2002. Under this, rates were revised on 1st and 16th of every month (i.e. every fortnight) on the basis of the average international fuel price of the preceding fortnight and currency exchange rate (i.e. rupee-US dollar fluctuations).
Last month there was an announcement on making a big alteration in the Petrol-Diesel price change mechanism. It was proposed that starting from May 2017 the fuel prices will be aligned to international oil market on a daily basis following the trend prevalent in most advanced economies of the world. So, all this hue and cry you are hearing about the increase in fuel price in five big cities in news is actually a part of the implementation of this new mechanism.
As part of a pilot project, from Monday, May 1 2017, five places — Puducherry, Visakhapatnam, Udaipur, Jamshedpur and Chandigarh will witness the new mechanism of selling fuel on daily revised prices. This step shall come ahead of a nationwide rollout of the scheme in coming future. Thus, basically, the consumers will have to check the prices on a daily basis before they go for refueling. Yes, you read it right!
Petrol price was last revised downward by Rs 3.77 a litre in April and diesel rates were cut by Rs 2.91. This was the first revision in two-and-half-months as oil firms did not change prices during assembly elections in five states, including Uttar Pradesh and Punjab.
(Source: News, Press Trust of India)
As the measure is new for the country and its overall impact can only be known once the model is brought into practice completely, it would be a little early to reach to conclusions. The dealers too have been skeptical that their profitability will decline as an effect of the new regime. However, let’s try to discuss some of the eventualities in this regard.
Technically, after deregulation, the OMCs enjoy the freedom of determining prices but to say that they have been completely free from political considerations would not be an absolute truth. Political factors, pressures and especially elections often guide the changes in fuel prices to some extent. Therefore, the changes occurring daily since they would usually be around a few paise per litre only, the political pressures for hiking the prices will be nugatory. Moreover, the new regime would run in a fast manner as prices will have to be changed daily-urgently. This won’t leave much space for political interferences. In all, it looks a little unlikely that this system would be feasible for serving the political interests of the parties.
The oil prices in international markets do not markedly fluctuate on daily basis. Looking at it from a long run perspective, one would reckon that the price changes will not affect consumers severely. However, the possibility of some major international events taking place on the global forum cannot be denied. Therefore, if such an event (For instance, Wars, Recession, Oil crisis etc.) affects crude oil prices then the commuters inside the country too might feel the effect on their fuel budgets.
Anyhow, only an assessment of consumers’ observations and feedback once the pilot has been carried out can uncover the real outcome.
Once the new mechanism comes into effect, the prices of essential items such as eatables, fruits and vegetables may witness variations on daily basis too. However, this may or may not add to inflation as inflation is a sustained increase in general price level.
The Oil firms will have to deal with a relatively lengthier process of maintaining their sales and cash receipts as the daily happening price-movements will immediately reflect in their account books.
Opinion: What do the concerned people say!
To dig deeper into the pros and cons, let us look at some of the statements and viewpoints of the people from the field itself.
Chairman IOC, B. Ashok told the reporters:
“It is technically possible to change rates daily but we have to first do a pilot. Once the pilot is done and its implications studied, we will extend it to other parts of the country.”
R.S. Butola, a former chairman of Indian Oil stated:
“If there is heightened volatility in global markets due to geopolitical developments, it could get reflected in domestic retail prices too. Therefore, companies are doing the right thing in testing the model in pilot projects to see how its impact and consumer response. In the medium- to long-term, daily price revision may be a good idea as is practiced elsewhere,”
Some of the dealers also pointed out that the pilot might lead to confusion among the commuters as the rest of India will become aware of the upcoming prices from the price flow in these five cities.
Overall, it has been opined that daily price changes will remove the big leaps in rates; and consumers will be more synced to the international market dynamics.
Preparations And Promises.
IOC said petrol in Udaipur costs Rs70.57 a litre and diesel Rs61.23, while in Jamshedpur petrol costs Rs 69.33 a litre and diesel Rs60.26. A litre of petrol costs Rs67.65 in Chandigarh and diesel is priced at Rs57.74. In Vizag, petrol costs Rs72.68 a litre and diesel Rs62.81. In Puducherry, petrol is priced at Rs 66.02 per litre and diesel Rs58.68 a litre.
The formula for price determination shall take the base prices of petrol and diesel as the global benchmarks. Further, Marketing margins, dealer tax, commission and other levies will be summed up and added to the base price.
Regarding how the dealers are going to ensure timely dissemination of information to the common man, the IOC has said that customers may verify fuel prices by downloading the company app or visiting its website.
“Oil companies have already installed hardware and software needed for daily updates at our outlets. It will be an automated technology connected to VSAT. If it fails, we will display the prices manually.” Arjun Singh, president of Chandigarh Petroleum Dealers Association informed the media persons.
(VSAT: Very Small Aperture Terminal is a satellite communications system that serves home and business users).
It was claimed that technological innovations will help oil marketing companies (OMCs) change price at midnight starting from May 1. Adequate information on prices will be provided to consumers too via SMSes and press releases. Incidentally, the circulation of relevant information was successfully done indeed on time. But confusion and chaos among a few consumers cannot be denied.
Provided the five pilots succeed in terms of implementation and attaining their objectives, the daily price change regime could become a reality for the whole nation soon. Undoubtedly, revision of fuel prices on a daily basis is not going to be an unmanageable task for the state-run fuel retailers.
But ultimately the success of the proposed change will also depend on consumers’ reaction to price volatility. So, monitoring the same would be a wise and needed step!