Topic Presentation

Introduction

Price mechanism is an economic term that deals with the buyers and sellers who conciliate prices of goods or services depending on demand and supply. A price mechanism refers to a wide variety of ways to match up buyers and sellers through price distribution. An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to participate in a trade , the purchaser will declare a price he is willing to pay (the bid price) and seller will declare a price he is willing to accept (the ask price).

The case of petrol:
The case of petrol is somewhat different. The difference lies in the fact that the law of economics is turned upside down in its case (or any other fuel for that matter). There exists no competition between various marketing companies and the price that we pay has little to do with the actual cost of production.

India in the world scenario:
India sadly is one of the top ten countries with highest petroleum prices. Public uproars because of heavy price rise in petrol have become commonplace. This is primarily because the price rise here is associated with a host of other factors apart from production cost. Three oil marketing companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum have monopoly over the Indian petrol market. Depending on the quantity supplied and the quantity demanded, ideally, the price at which these three marketing companies sell fuel should be different. But they are not. This is basically because price mechanism of petrol is based on a number of factors as stated below and also because there is a healthy interference by the government which makes sure that the companies cannot fix the price of petrol they sell at will.

Petrol’s pricing structure:
Fuel component-52%
Customs Duty-4%
Excise Duty-25%
Sales VAT-17%
Dealer Commission-2%

Components of petrol ‘price’:
The price we pay for petrol actually consists of a host of factors including subsidies, ‘under-recoveries’, taxes, commission and motor spirit (including transportation).
While Subsidy refers to a monetary abount paid to a business or economic sector, “under-recoveries” points out to an imaginary term used by the UPA Government of India to make the Indian Oil Marketing PSUs “loss-making”, whereas they are in fact making HUGE PROFITS and adding immensely to the national exchequer. This, term excludes the actual gate price and selling price, making monkeys of Indians.
This is mainly done to “deregulate” Petrol prices in India under the diktats of the World Bank, and hence is mala fide on the part of the UPA Government led by MM Singh, a reported puppet of the World Bank and member Club of Rome, a Globalist body. It is the complex play of these elements along with the determinants of petrol price that result in the price we pay.

Determinants of price:
The oil companies affirm a strange pricing policy that is connected neither to their costs nor to the competition in the market. The prices of the products that they sell in the domestic market are driven by the prices of the identical products in the global markets; currently domestic prices are determined by the price swings in the Singapore oil market. The oil companies simply take the price of petrol in the Singapore market, apply the rupee-dollar exchange rates to that price, add other costs such as freight and import duties and lo, there comes the price that they should charge domestic consumers. Interestingly, not a litre of the petrol that these companies sell in the market is imported from Singapore; they are all generated here in their own refineries.

The Problem:
Now, the problem is that most often the price arrived at has no relation to the prevailing domestic retail price, which is invariably lower. Thus is born the idea of “under-recoveries,” something that is unique to our oil companies. You should note that they don’t call this loss, simply because it is not a loss. A loss will be caused when a company is forced to sell a product below its cost of production. In this case, we have no idea what the cost of production is for petrol or diesel or, for that matter, any petroleum product. Under-recoveries are therefore bogus numbers that have no resemblance to real world. Yet, pricing decisions for the domestic market are set up on these numbers. A careful reading of the statements that the oil companies put out whenever prices are revised will be enlightening. Here is an extract from the latest one released on November 30. “Review of international oil prices and INR-USD exchange rate of relevant fortnight for prices effective 01.12.11 brings out a further downtrend in international oil prices and a further weakening of the exchange rate. Thus, while petrol international prices have moved down significantly from $116/barrel approx. to $109/barrel approx., the exchange rate has deteriorated from Rs. 49.32/USD to Rs 51.50/USD. The combined impact of the two factors is an over-recovery of Rs. 0.65/litre. It has therefore, been decided to revise the petrol prices downward by Rs.0.65/litre (excluding state levies) w.e.f 1st Dec. 2011.”Simply put, what this statement from Indian Oil Corporation says is that petrol prices have dropped in the global markets and despite the depreciation in the rupee, there is still room to reduce the domestic retail price. Of course, it goes without saying that if there is a rise in petrol price in the Singapore market and the rupee continues to depreciate, domestic prices will be revised upwards. This flawed pricing model is a legacy of the control era when we had the assigned price mechanism in place. This model does not apply in a liberalized market where the prices should be free and be determined by the costs of refining petroleum products and market competition, say analysts.

Conclusion:
These problems arise because the winds of change that led to serious reform in industries such as telecom have largely bypassed the oil industry. What we need is a powerful dose of reform in the form of freeing of pricing of petroleum products while simultaneously encouraging competition. We also need a strong regulator for the retail market; the existing Petroleum and Natural Gas Regulatory Board is not efficient with its task of regulating the retail market. These are crucial issues that need to be addressed sooner than later by the government.[/toggle]