How is the price of petrol and diesel fixed?

Parity Price When the price of a product is directly linked to another price

Import parity price A price charged for a domestically produced good that is set equal to the domestic price of an equivalent imported good (the world price plus transport cost plus tariff) Export parity price, The price that a producer gets or can expect to get for its product if exported

trade-parity price A model for diesel and petrol, which would be a weighted average of the import parity and export parity prices in the ratio of 80:20.
Purchasing power parity the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. The PPP conversion factor shows how much of a country's currency is needed in that country to buy what $1 would buy in the United States.

Administered Price Mechanism - APM (1970-2001):

Till 1970 it was import parity price

In 1970, APM was introduced by which govt would insulate the impact of international crude oil by maintaining an Oil Pool Account (OPA). OPA consisted excise duty, customs duty and sales tax included in the petrol price.
So, using this Oil Pool Account (OPA), the Govt gave money to oil companies to maintain their under-recoveries (because LPG and diesel are sold by Govt at subsidized prices)

Till 1990, OPA was positive and Govt was able to maintain balance with domestic prices and oil company costs In 1991, post liberalization, consumption pattern increased and in late 90's OPA became OPD i.e Oil Pool Deficit running into thousands of crores. This forced Govt to increase petrol and diesel prices to maintain OPA and yet running subsidy program for kersoene and LPG

Import Price Parity (done by NDA Govt in 2001) In 2001, The NDA Govt dismantled APM and allowed market prices (international market) to determine domestic prices.

Although this mechanism dismantled Oil Pool Account concept, Govt did not rationalize taxes imposed on states
The result: Increase in oil prices again. Import Parity Price began to be used when not petro products but only crude oil was imported

The Import parity price (is the price at which the seller exports to another country including cost, insurance and freight expenses)
IPP for crude oil is much less than petro products.

Trade Parity (2006-till present) When International prices began to increase, the import parity pricing mechanism was not helpful to Indian economy It just began to increase and increase crossing 120$ a barrel. Then the Govt decided to use trade parity mechanism wherein the price was fixed as 80:20 ratio i.e 80% import parity and 20% export parity. The export parity price could be incorporated because India began to export certain petro products.

So, by shifting to this mechanism, there was a considerable reduction in prices.

However, the taxes induced were not changed resulting in the same situation

Now, future? Deregulation and rationalization of taxes? Kirit Parikh Committee recommended in Feb, 2010 to the Govt to dismantle any interference in pricing mechanism and rationalize taxes across the country.

Suggestions of Krit Parkh Committee

if we allow our market open to international markets. It can be very deadly. Just see what happens if oil reaches $150 a barrel, petrol will be Rs.76/liter or so.

Petrol price as on 01.08.2011 (Rs. per litre)

Price paid to refinery @ Trade Parity Inland Freight Marketing Cost and Margin Excise Duty (including cess etc.) Total price after Excise duty Less: Under-recovery absorbed by OMCs Price Charged to Customer - Depot Price Dealer Commission Value added Tax (Including VAT on dealer commission.) * Retail Selling Price * * 35.39 + 0.65 + 1.47 +14.78 = 52.29 (-) 00.71 = 51.58 + 1.50 + 10.62 = 63.70

VAT as per Delhi. It varies from 33 % to 15 % from State to State ** Petrol Price is decontrolled with effect from 26 June, 2010. The price break up is as per IOC.
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Buildup of Retail Selling Price of Diesel at Delhi as on 01-Oct-11

Particulars Refinery Transfer Price (RTP) for BS-IV Diesel(Price Paid by the Oil Marketing Companies to Refineries) Add : Inland Freight and Delivery Charges Add : Marketing Cost of OMCs Add : Marketing Margin of OMCs Total Desired Price - Before Excise Duty, State VAT and Dealer Commission Less: Under-recovery to Oil Marketing Companies Price Charged to Dealers (Depot Price)- Excluding Excise Duty & VAT Add : Specific Excise Duty @ Rs.2.06/Litre (Rs.2.00/Litre+ 3% Education cess) Add : Dealer Commission Add : VAT (including VAT on Dealer Commission) applicable for Delhi @ 12.50%, Rebate of Rs.0.38/Litre and Air Ambience Charges @ Rs.250/KL. Retail Selling Price at Delhi Rs./Litre 38.26 0.71 0.64 0.76 40.37 6.90 33.47 2.06 0.91 4.46

40.91

Buildup of Retail Selling Price of PDS Kerosene at Delhi as on 01-Oct-11

Particulars Refinery Transfer Price (RTP) for PDS Kerosene (Price Paid by the Oil Marketing Companies to Refineries) Add : Inland Freight and Delivery Charges Add : Marketing Cost of OMCs Add : Marketing Margin of OMCs Total Desired Price-Before Excise Duty, VAT and Wholesale & Retailer Commission Less : Subsidy by Central Government Less: Under-recovery to Oil Marketing Companies Price Charged to Dealers (Depot Price)- Excluding Excise Duty & VAT Add : Excise Duty (Including Education Cess) Add : Wholesale & Retailer Commission and Other charges fixed by State Government Add : VAT (including VAT on Wholesale & Retailer Commission) applicable for Delhi Retail Selling Price at Delhi

Rs./Li tre 37.05 0.63 0.39 0.37 38.44

0.82 24.63 12.99

0.00 1.13 0.71 14.83

Buildup of Retail Selling Price of Domestic LPG at Delhi as on 01-Oct-11

Particulars Refinery Transfer Price (RTP) for Domestic LPG(Price Paid by the Oil Marketing Companies to Refineries) Add : Inland Freight and Delivery Charges Add : Marketing Cost of OMCs Add : Marketing Margin of OMCs Add : Bottling Charges (Filling and Cylinder Cost) Total Desired Price-Before Excise Duty, VAT and Distributor Commission Less : Subsidy by Central Government Less: Under-recovery to Oil Marketing Companies Price Charged to Distributor (Bottling Plant Price)- Excluding Excise Duty & VAT Add : Excise Duty (Including Education Cess) Add : Distributor Commission Add : VAT(including VAT on Distributor Commission) applicable for Delhi Retail Selling Price Retail Selling Price at Delhi (Rounded) Rs./Cylinder of 14.2 KG 572.71

35.87 12.03 6.95 38.68 666.25 22.58 270.24 373.43 0.00 25.83 0.00 399.26 399.00

Product-wise Under-recovery of Public Sector Oil Marketing Companies (OMCs)

Product Diesel PDS Kerosene* Domestic LPG* Unit Under-recovery (eff. 01-Oct-11) Rs`/Litre 6.90 `Rs/Litre 24.63 `Rs/Cylinde 270.00

OMCs are currently (effective 01-Oct-11) incurring daily under-recovery of Rs 271 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.
The difference between the cost price and the realized price represents the under-recoveries of the OMCs