Burning Desires- Have Desire to Earn, Not Burn

Burning Desires
Why the benefit of
reduction in Crude oil
prices has not been
transferred to public?

02 Aug, 2015

PUBLISHED BY, YOGESH VALLABHBHAI GABANI

https://www.facebook.com/bdesires

Burning Desires- Have Desire to Earn, Not Burn

Why this topic?

I have received queries on this issue as in;
Why the price reduction to desired level has not found?
Why the benefit of overall reduction on Global crude oil prices has not been transferred to
public?
There are various factors involved as far as governments action is concerned with respect to Petrol and
Diesel prices. To explain the same I have decided to publish this paper.

Factors to be considered before understanding the reasons

1. Global crude oil prices and freight charges Imported by PMOs (Petroleum Marketing Organizations
or simply petroleum companies)
2. Exchange rate
Why?
The payments of imported crude oil will be in dollar denomination.
3. Excise Duty
4. Dealers commission or simply petrol pump owner
5. VAT

Burning Desires- Have Desire to Earn, Not Burn

Trend in global crude oil prices

Back in June 2014, the price of Brent crude was up around $115 per barrel. As of January 23, 2015, it had
fallen by more than half, down to $49 per barrel.
Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in
many energy exporting nations, while consumers in many importing countries are likely to have to pay less
to heat their homes or drive their cars.

Who will gain?

The countries which are net importer of crude oil will benefit significantly. On the other hand the net
exporter will lose on their revenue collection
India falls into the category of net importer and indeed, GoI has benefited out of it.

Why the linear relationship is not there?

Here we are comparing two factors.

1. Global crude oil price and,

2. Petrol and diesel prices domestically (In India)

Burning Desires- Have Desire to Earn, Not Burn

Consider one fact to support this.

Currently the global crude oil prices moves around 59$/barrel and earlier when it was trading at same price
level, the Petrol price was 40 Rs/ litre. Means there is a shift in the linear relationship.
Now to understand that lets undertake one practical example.
Consider you have taken a bank loan of 50 Lakhs and you have just enough salary to meet the very basic
needs of your family after paying your monthly installment. Lets make it worse; you even defaulted on
few installments in the past.
Now you get a massive salary raise. What would you do? You will first think of using the surplus money to
repay your loan faster rather than buying a new car or taking your family out on holiday.
Now, replace you as Government and loan as external borrowings expresses in terms of Fiscal Deficit.
There has been reduction in Petrol and Diesel but how much matters here,
The cumulative reduction in the prices of Petrol and Diesel has been nearly 10 and 6 rupees respectively
since the crude oil price started falling. That means the economy has benefited for sure. Lets understand
in what form?

Government has successfully leveraged the benefit from reduced crude oil price
to achieve fiscal deficit targets.
There has been four times increment in excise duty. But we should understand that who will bear it?
The petroleum companies
That doesnt mean that these companies are making losses. If it has been the case than share prices of
these companies have fallen significantly but, it shows upward trend.
Why?
The petroleum companies would be able to substitute the impact of increment in excise duty by reduction
in crude oil prices. Know Well, Out of this they may benefit but this benefit could be marginal and not
significant.

Burning Desires- Have Desire to Earn, Not Burn

That means, Government must have benefited or else where is the benefit?
Yes, this is what happened.
The recent drop in oil price has given a bonanza of savings to the government .They have passed only a
fraction of the drop in prices to the consumers and possibly kept the rest to keep the deficit under control.
Thus government is filling the mammoth deficit which has been accumulated.
When the oil prices rise, the government doesn't want to take up more loss, but when the price falls, they
increase the excise duty on oil, thereby limiting the fall in price on customer and that is the reason why the
linear relationship is not found. This way they are collecting more revenue which means faster end to the
debt. So, Oil price fall is an opportunity for the government to improve India's financial condition.
Another factor is Exchange rate
Why it matters?
Its because the payments by petroleum companies to crude oil suppliers is in dollar denominations.
When Petrol was Rs 40/litre the exchange rate (the rate which the crude oil is imported in our country) was
around Rs 40 per USD. Now it is Rs 63.50 per USD. So, the import costs of the Oil Marketing Companies
have increased tremendously.
Although to support the argument, the crude in rupee terms has fallen by 40% since June whereas the
crude oil prices has fallen by 50 % but the prices of petrol have been reduced by around 18-22%. That says
something about their unethical profits.
What does it indicates?
Here the 10% gap in prices (40% and 50%) has eaten up by weakening of rupee against dollar and the
second gap (between 50% and 18%) indicates governments gain out of it.
Sources in the Government claim the aim of this increase is to take advantage of falling international prices
of crude oil and generate additional funds to partially neutralize the lower than-anticipated tax collections
in the current year.