Oil firms, govt are earning well. But you may still have to pay high fuel prices

Indians singed by price pressures may not get any relief soon on fuel prices, as economists don’t expect the Central government to immediately cut taxes on petrol or diesel despite the availability of fiscal space and oil marketers earning close to Rs 10 for every litre they sell.

It has been more than a year since the government cut taxes on the pump prices, even as petrol retails at above Rs 100 per litre in many parts of the world’s most populous country, that is also home to millions under the poverty line.

For Indian consumers, any relief on the fuel price front still looks far away. It also delays any relief from the sharp spike in prices of essential commodities such as staples and vegetables.

OMCs’ financials rebound

The three state-run retailers — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — would see operating profit rebound to Rs 1 lakh crore this financial year, compared with an average of Rs 60,000 crore between financial years 2017 and 2022, and thrice of the last financial year’s low of Rs 33,000 crore, CRISIL said in a report.

IOC, BPCL and HPCL are estimated to have made a profit of Rs 8-9 on each litre of petrol and diesel sold at pumps, in addition to a healthy refining margin in Q1FY24. This profit comes as domestic retail prices remain frozen while international rates have fallen.

The oil companies make money from two businesses: refining — where they earn a gross refining margin, which is the value of refined products at the refinery gate minus the cost of crude oil — and marketing through retail pumps, where they earn a margin on the refined products. Crude oil prices averaged $94/barrel in FY23. However, retail prices have remained unchanged since May 2022.

To be sure, OMCs had previously incurred significant losses when global prices were higher, and they had to hold back price adjustments to assist the government in managing inflation, especially before polls in states.

“The oil marketing companies incurred large losses when crude prices were very high, and the pump prices were not commensurately increased. Clearly, the price points currently are to allow these companies to make up for those losses,” said Ranen Banerjee, Partner, Economic Advisory Services, PwC India.

According to brokerage estimates, the marketing margin on petrol for OMCs increased to Rs 9 per litre in the April-June quarter, from Rs 6.8 in the January-March period and a loss of Rs 10.2 in April-June of the previous year. The retail margin on diesel also rose to Rs 8.6 per litre in the April-June quarter, up from 50 paise per litre in January-March and a loss of Rs 12.50 in April-June of the previous year.

“The oil marketing companies are sitting with nearly Rs 10 per litre of over-recovery on petrol and diesel now. So, there is room for them to cut rates. Taxes need to be cut,” said Upasna Bharadwaj, senior economist at Kotak Mahindra Bank. “But in this environment, when there is a risk of a global slowdown having an impact on the domestic economy as well, probably, I do not expect the excise duty cuts to happen to that extent.”