If completely non-business ideas impose a disadvantage on a business, the political economy that allows this to happen would hardly qualify as market-friendly. And if the target of such a squeeze was almost exclusively foreign companies, the country in which it occurs would automatically be identified as China or China. Yet, it is so much in liberalizing India that reportedly puts a premium on ease of doing business that fuel retail has been made politically unstable. The foreign victims being considered include British energy major BP and Naira Energy, the Indian arm of Russia’s Rosneft.
India tried to open the fuel marketing business to private industry in the early 2000s. Reliance and Essari Licensed in a business dominated by state-owned oil marketing companies, and signed thousands of dealerships in different parts of the country. However, when global crude oil prices rose and Indian politicians discouraged from passing on high fuel costs to consumers, the government began subsidizing retail sales of petro fuels in a structure of administered pricing, but state-owned. Limited subsidies to companies with it meant that Reliance and Essari Pump, fuel was priced at a premium. This, apparently, was as durable as a snowflake in the Sahara. The private sector fuel marketing business almost came to an end in 2008.
Time passed, the government adopted the strategy of increasing the prices of petrol and diesel by Rs 0.5 per liter every month. When the administered price of petrol reached the market price, in June 2010, it was deregulated, giving OMCs the freedom to set their own prices. The process for diesel was completed in October 2014. Back then, oil marketing companies should have freedom of marketing and pricing, and the government did not give any subsidy on petrol or diesel. Reliance formed a joint venture with BP to re-enter fuel marketing. Essar Oil resumed operations, was sold to a Rosneft-led consortium in 2017 and rebranded as Naira Energy.
Things started to float until oil prices jumped in 2021. In November 2021, state-owned oil marketing companies stabilized their retail prices, although the global crude benchmark, Brent, rose from $81 a barrel in November to $97 a barrel in February. 2022, for reasons such as economic reform, cartelized production restraint and Russia’s invasion of Ukraine. Now, it is possible that the owners of state-owned oil marketing companies suddenly fell in the grip of sympathy for the common man and decided to absorb the loss (less recovery of cost from retail prices) while selling the fuel. , Presumably, he was conscious that rising fuel prices would inconvenience the ruling party in five crucial assembly elections, including in Uttar Pradesh, for February-March 2022. Pricing freedom explicitly includes the freedom to set loss-making prices.
Retail prices after the declaration of election results on March 10 petrofuel were raised. they climbed fast, reached 100 per liter for petrol in some states. This picked up a stink and the oil marketing companies renegotiated the prices on 6 April.
State-owned companies account for 90% of the market and act as value-setters. Private fuel retailers are the price takers. He saw under-recoveries from any sale of petrol or diesel. Reliance-BP continues, dealerships face supply cuts and order losses 700 crores per month. When, under political pressure, the government announced tariff cuts, state-owned oil marketing companies passed them on to consumers, during 137 days of price freezes at the end of 2021 and 40 odd days since April 2022. Under-recovery is reported instead of making up for the damage done 25-28 per liter of petrol and 10 liters on diesel.
In the case of integrated oil companies marketing as well as refining, super-profits at the refining end provide some consolation, especially if they also export their produce. But stand-alone marketing companies have nothing to cover their losses. It happens that private sector oil marketing companies are wholly or partially owned by foreign firms. Imposing losses on Indian subsidiaries of foreign companies to further the political fortunes of India’s ruling party does not bode well for India’s reputation as a destination for foreign investment.
Oil marketing companies should be really free to set their own prices and compete in the market. If the government wants to protect consumers from rising fuel prices, it should offer subsidies in the form of direct cash transfers to more deserving sections of consumers, or even generalized reductions in levies, but allow retail organizations to cover the deficit. Should not be forced to absorb. A truly competitive market will realize efficiencies in fuel storage, transportation and retailing, which India currently forgoes.