Dynamic Petrol Pricing

By Ramrai Naik

Dynamic fuel pricing model comes at a time of falling international crude prices trend

The Central Government is on an economic reforms spree where the decades old financial habits are replaced with new systems. Be it the railway merger, unified taxation, or the probable change in financial year, which is in sync with global practice.

In the latest move, the government and the oil marketing companies have decided to have daily revision of fuel prices. The newly introduced mechanism has attracted mixed opinions from the consumer as well as the retailer community. This dynamic pricing concept is followed globally in advanced markets, as the consumers get immediate benefits from the changes in international crude oil prices. And it comes at a time, when trends of crude oil only shows fall in prices consistently or more so than increase of the same.

That, however, is not the end of it. There are certain demands by the dealers’ fuel association across the country that are needed to be considered before the new rule becomes a norm. Earlier there was a 15 day cycle wherein the oil companies used to average the international crude prices – this was in tune with the currency rate; and do the price revision accordingly.

In the new system, prices will be revised with the same method but on a daily basis where a retailer would get the next day’s price at around 8pm; then the following day, the retailer would update the new price at 6am at his respective fuel station.

The new mechanism is aimed at keeping fuel consumption stable with the minor changes in prices on a daily basis, rather than the earlier steep revision in the half a month cycle which made consumers price conscious. Stability would also be seen in the prices of other commodities which are directly linked to diesel, which is used for transportation of goods.

In the latest move, the government and the oil marketing companies have decided to have daily revision of fuel prices. The newly introduced mechanism has attracted mixed opinions from consumers as well as retailers

     Before implementing the new system, the government had tested the daily price revision of fuel as a pilot project in Udaipur, Jamshedpur, Pondicherry, Chattisgarh and Vishakapatnam. Upon receiving positive feedback from those regions, the government and oil marketing companies had given a go-ahead for fuel retailers to adopt the new method. Retailers have successfully executed the new mechanism nationally, starting from July 16.

Retailers Compensated

Retailers had often been critical of the price adjustment set by the fuel companies as well as the government. According to retailers, the margin has often remained thin and they had to bear periodical losses due to several factors like increase in wage cost, fuel evaporation etc. Since half a decade, there has been a demand from the retailer’s side to hike the commission received on each litre as compensation.

At the time of implementation of daily fuel prices revision on July 16, the All India Petroleum Dealers Association had threatened to call a nationwide strike. However the strike was later called off as the government and oil companies assured to resolve the issue by the end of the month. As assured, from August 1 oil marketing companies have increased the dealer’s commission by `1 per litre for petrol and `0.72 per litre for diesel. Adding the previous commission, the dealers now would overall attract `3.55 a litre commission on petrol and `2.37 a litre on diesel.

Ajay Bansal, president of All India Petroleum Dealers Association welcomed the decision and commented, “This is a good move by the government and oil companies. The decision will mainly benefit lowselling retail outlets, many of which were running on losses.”

Oil Companies have devised a formula of commission for retail outlets as per their sale. Low selling retail outlet will attract higher percentage commission in comparison with the high selling dealers. However, high selling dealers will benefit from increase in sale but the quantum will be less. Dealer margin will further be provided in two parts – that is daily and monthly commission.

Apart from the commission that is received on sale, the new mechanism requires prices to be updated on a daily basis; hence retailers have been demanding 100% automated systems across fuel stations in the country. The automated system which currently has only been operational at 40% of the fuel stations, updates the new prices through a centralised online server of oil marketing companies. Whereas the rest 60% have to follow the manual method which requires the retailer to manually update the price.

Retailers find the manual method time consuming in the case of multiple nozzles in a station. It has been informed by a retailer that more than half an hour of sale is lost during the price revision. Fortunately it takes place at 6 am when the sale is on the slower side. Also there has been growing concern as any mistake on the part of staff in revising prices would attract a heavy penalty.

Paresh Joshi, President, All Goa Petrol Pump Dealers’ Association says, “One of the problem a dealer faces is that he cannot be present at the fuel station every day. Hence he has to rely on his workmen to do the job. It is good if the staff is trustworthy; however if some staff plays mischief in updating, then the oil company can put a charge against us for deliberately overpricing the fuel. Similarly accounting work would increase as prices change every day.”

Criticising the oil companies and the government, Joshi added, “The government have put multiple conditions on the increased commission, they have instructed us that all the petrol pump employees must be given Pradhan Mantri insurance, payment must be made in cheque or through the bank and that there should be toilets in each petrol pumps. We were hopeful of the unconditional hike in commission; however this is how they have planned to compensate us and for some reasons oil companies are retaining the money and will then be reimbursed in a periodical manner.”

Price Monopoly

As the decision of commission hike came in favour of dealers, consumers were unhappy as oil companies have ultimately put the cost on the end user. Consumers feel that they have always been exploited by the monopolistic behaviour of the government and the oil companies.

The current NDA led government has been rather lucky since it assumed power in 2014. International crude prices have been drastically falling since May 2014. The fall in crude prices since then is estimated to be around 58%. The central government which had rallied against the soaring fuel prices before the elections has failed to transfer the benefits to the consumer.

The government which has put a non profiteering clause in the GST for businesses has failed to put same on themselves. Experts however have defended the government’s move in not lowering prices which has had a positive impact on the country’s economy, inflation, fiscal deficit and gave a rather convenient source of income to the exchequer

 

The new mechanism is aimed at keeping fuel consumption stable with minor changes in prices on a daily basis, rather than the earlier steep revision in the half a month cycle which made consumers price conscious. Stability would also be seen in the prices of other commodities which are directly linked to diesel, which is used for transportation of goods

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