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Two sides of the coin called crude price transparency

Prime Minister Narendra Modi calls for "transparency in pricing of crude and gas markets", but has the Indian government been fair enough in passing on the benefits to end consumers when international crude prices fall?

By SAMUDRAJIT GOHAIN

Addressing the India Energy Forum on Sunday, Prime Minister Narendra Modi called for “transparency in pricing of crude and gas markets”. His remarks came on the backdrop of wild swings in international crude prices a few months ago and this prompted several top policymakers from across the world to call for “transparency” in crude prices.But is transparency an issue with only international crude and gas prices? What about Indian consumers vis-a-vis volatility in international crude prices? Is the reduction in global crude prices passed on to the end consumers in India whose per capita gross domestic product (GDP) of about $2000 is even lower compared to many southeast Asian countries and hence any reduction in petrol/diesel prices bring much needed relief to an average Indian?

The OPEC factor
First let us understand why this issue pertaining to lack of transparency in the international energy market has arisen. For this we have to go back to the era of the 1970s during the peak of Arab-Israeli war in the Middle East. Majority of top crude and gas producers are Arab and Gulf countries. These countries formed a cartel called OPEC (Organisation of Petroleum Exporting Countries) in the 1970s so as to put oil embargo against common enemy Israel more effectively, and additionally, to dictate global crude and gas prices through a common platform.
That is the genesis of the “lack of transparency in crude and gas markets’ as is perceived by major crude and gas importing countries such as India and China among others. These consumer countries are hardly producing any significant amount of crude or gas domestically and hence have to depend on the whims and fancies of OPEC countries and few non-OPEC countries like Russia (another significant producer of crude and gas) for pricing trends in energy. In a nutshell, unlike typical theory taught in Economics textbooks, supply doesn’t increase when demand increases and vice versa. Crude price basically increases if production quota by the OPEC countries are held constant in the face of rising or steady demand. But very curiously, crude price can also increase if OPEC countries decide to curtail production to create demand-supply mismatch.
Financialisation of commodity markets 
But this is not the only reason for the lack of transparency in crude and gas prices. In the last 30 years or so, energy markets have become increasingly another example of “financialisation of commodity markets”. “Financialisation” of energy markets like crude and natural gas mean that derivative future contracts signed in prominent commodity exchanges like NYMEX (New York Mercantile Exchange), CME (commodity market exchange) and others dictate physical energy markets. Top global investment banks like Goldman Sachs, Morgan Stanley and a plethora of hedge funds take up trading and speculative positions in future contracts of crude and gas with billions and trillions of dollars of clients’ and investors’ money. These big financial organisations are themselves not the end users of crude or gas. But because of their huge trading and speculative positions in crude and gas, they in turn are playing a big role in huge volatility in energy prices, which may have nothing to do with the actual buyer and seller kind of transaction. Hence ‘financialisation’ of energy markets too are blamed for lack of transparency in global energy markets and it is not without reasons.

But charity begins at home

Let us do a break up of petrol and diesel prices at the consumer end, say in the national capital Delhi in May 2020. May is important as international crude prices came down significantly during May as Covid-19 pandemic was making everyday new highs in infections and casualty figures in major western economies such as the USA and UK.Diesel price was around Rs 66 per liter in January 2020. Then it touched Rs 62.5 per liter in March/April in line with a big fall in global crude prices. But from April end, it started going up to Rs 82.5 per liter in mid-July. From this peak, it came down gradually and now stands around Rs70.5 per liter (Delhi area). Petrol price too followed similar trends.
On the other hand, WTI (West Texas Intermediate) benchmark on crude was $60 per barrel in January. From then, it came down gradually to hit around $10 per barrel in mid-April. From there, it has gradually recovered to around $40 per barrel level over the past four months. So there has been a big dichotomy in Indian petrol and diesel price trends against international crude price trends since February/March.The point of contention is that the central government is prompt in hiking excise duty on petrol and diesel along with rise in global crude prices. But it is quite hesitant in passing on the benefits of fall in crude prices to end consumers. So Indian consumers end up paying very hefty taxes, levies and cess on petrol and diesel. Infact, as much as 69 per cent of petrol and diesel prices in India comprises only taxes, levies and cess.

  • Excise duty: It is Rs 32.98 per litre of petrol, while it is Rs 31.83 per litre of diesel.
  • Value added tax (VAT): It varies from state to state and can be as high as 30 per cent for states such as Madhya Pradesh, Kerala, Rajasthan, Karnataka among others.
  • Dealer commission: It varies from state to state and one location to another. In general, it ranges between Rs 2 and Rs 4 per litre.

Let us look at some other countries to compare percentage of taxes, levies and cess in total petrol or diesel price: Italy (64 per cent), France (63 per cent), Germany (63 per cent), Britain (62 per cent), Spain (53 per cent), Japan (47 per cent), Canada (33 per cent), USA (19 per cent). 
[Source: Petroleum Planning and Analysis Cell, Indian Oil Corporation.]

Each of the above countries has per capita GDP which is as much as 7-10 times higher than that of an Indian.
In defence of its actions, the Government of India says that gasoline prices are much higher in say the UK, USA, Hong Kong, Thailand and others. But the government conveniently forgets that the per capita GDP of these countries are also much higher than India and hence the pinch on average consumer’s purse due to petrol and diesel price hike is much smaller. Ours is a country with just $2000 per capita GDP and hence the impact of fuel price hike is much bigger. As they say, charity must begin at home.

Samudrajit Gohain holds a B.Tech in Mining from NIT, Surathkal ,Karnataka and is an associate member of CISI, London. He specialises in international financial markets, trade, economic relations. He worked in the mining industry for a few years before shifting to financial management and investment.