Petrol prices could be increased to Rs 130/liter to avoid under-recovery

State-owned oil companies such as Indian Oil, Bharat Petroleum Corporation and Bharat Petroleum are facing an under-recovery of Rs 12-15 per liter of petrol and diesel sold in the market, and may have to raise selling prices by around Rs 30 per liter to plug the under-recovery, according to industry sources.

These companies had last raised petrol and diesel prices on Nov 21 last year, and have not been allowed to raise prices for the last five months by the government due to state elections.

However, they raised both petrol and diesel prices by around 80 paise per liter overnight, indicating that a new bout of price increases have started.

Petrol and diesel are among the most highly taxed items in India, and the tax on one liter of petrol is around 100-125%, depending on the state.

For example, when the actual price of petrol was around Rs 45 back in November, the selling price of one liter of petrol ranged from Rs 95 to Rs 105.

At present, the actual price of petrol has risen to Rs 65-66 per liter, and including tax, the selling price should be around Rs 125 to Rs 140 per liter, depending on the state.

However, petroleum companies have been forced to sell petrol at only Rs 97-105 for the last several months so as not to impact the outcome of elections in states like Uttar Pradesh and Punjab.

However, during this period, the price of Brent crude oil rose from $80 per barrel to $117. Because of this, oil companies are currently making ‘under-recoveries’ of Rs 12-15 per liter of petrol and diesel sold in the market.

Government of India allows companies such as Bharat Petroleum, Indian Oil and Hindustan Petroleum to make a specified margin (profit) on each liter of petrol and diesel they sell.

These companies then add this profit margin to their total cost, and arrive at an ideal selling price.

If they are forced by the government to sell below this ideal price, then they say that they are making under-recoveries. The current under-recovery is estimated at around Rs 15 per liter.

Generally, government of India allows these companies to increase their selling prices to recover their under-recoveries, and therefore, the current spate of price increases are likely to continue for several weeks until the companies have recovered most or all of their under-recoveries sustained over the last 2-3 months.

However, if they raise the price by Rs 15, most of the taxes will also increase in proportion, taking the total price increase to around Rs 25-28 per liter.

Therefore, from the Rs 97-106 range, petrol prices would have to rise to Rs 125-135 range if companies like Indian Oil have to continue to make their regular profits.

Out of the current price of around Rs 105 per liter of petrol, around Rs 33 goes to the central government and around Rs 25 goes to the state government, though this number is lower in some states. Dealers get around Rs 4.