Fuel Woes

GOI jacked up the prices of diesel and cooking gas today. The reason was the usual one, oil marketing companies are losing money due to the subsidies. This is interesting as the price of crude has been dipping. Oh! but we can't complain, diesel, cooking gas and kerosene is heavily subsidized int his country. In fact, we are the only nation in the world where kerosene is cheaper than drinking water. Let us understand this subsidy more -

Crude oil price (25/6/'11)

WTI crude - $92

Brent crude - $105

India calculates the price as a weighted average of WTI and brent in the ratio 5:4

Price of imported crude - $97.77

Price paid to ONGC for a barrel - $55

We get the crude at a discount ranging from 10% to 80%. I am adjusting the discount with the transportation expenses incurred during import. As India imports 75% - 80% of its oil

Average price paid per barrel - $89.26

Quantity of oil in a barrel - 158.9 liters

So the price we pay for one liter of crude oil is $ 0.56 or Rs. 25.27

According to refining companies, the operational costs of refining a liter of crude is 52 paisa. So the total cost of refined oil should be approximately Rs. 26.

As of today, petrol costs Rs. 71 and diesel Rs. 43 (Bangalore rates). In other words, there is a 200% and 100% additions of price due to government taxes and high costs incurred by petroleum companies.

Taxes on oil in India include -

1. Import/Customs duty on crude oil

2. Excise duty

3. VAT imposed by states

But this is not all, oil marketing companies are another big group of money guzzlers. These organisations which run on one of the most inefficient and bureaucratic organisational structure are a big reason for the hikes. We keep hearing about the oil companies losing $5, $10 or $2 per liter of petrol sold in India and the petroleum minister goes out of the way helping them out by issuing oil bonds or hiking the prices. What I don't understand is that why is it that these companies are never asked to cut costs internally. Why does not the corporate cost cutting mechanisms and concept of leaner organisations apply to them? These companies run some of the most inefficient supply chains in the world, give exorbitant commissions to their dealers who don't need to do any marketing to sell and carry outrageously overstaffed and inefficient organisational structures.

Every time when a hike happens, there is a lot of hue and cry about bringing down the taxes on oil. But this never happens because oil is the biggest revenue source for GOI and GOI needs all that money to feed its staff who sits at 5 levels of bureaucratic maze and passes files at a rate of 2 per day. The entire system which requires 5 people is run by 500 people now and we are forced to pay more for our daily needs. The significant cost and time overruns is not the only bad aspect of this structure; the system also results in high levels of risk aversion and indecision. Because one has to justify one's position, everyone wants to be part of the decisions and significant amount of ego clashes ensure that good ideas are nipped off at inception itself.

If you think about it, government is jacking up the cost first and then giving a discount on the increased cost and calling it subsidy. What an irony?