09-10-2012, 04:04 PM
Petroleum Pricing in India: Transition from APM to MDPM
Petroleum Pricing.pdf (Size: 891.64 KB / Downloads: 77)
Introduction
Economic growth is inextricably linked to energy. Energy is required for almost all
economic activities. Petroleum, comprising of crude oil and refined petroleum products, is
one of the prime sources of energy in the world. To a large degree, petroleum fuelled the
rapid post-war economic growth achieved in the OECD (Organization for Economic
Cooperation and Development) countries. A few decades earlier, petroleum began to erode
coal’s dominance as an energy source; by mid-century (1950s) it had taken over as the
preferred fuel in these countries. By the 1970s, petroleum was powering transportation,
supplying one-third of industrial sector power and roughly one-quarter of electricity
generation in the OECD countries.1 Petroleum has been playing an increasingly significant
role behind the growth story of the non-OECD countries as well. Oil consumption in the
developing and emerging non-OECD countries especially India and China now dominates
global oil demand growth.
However, the central problem that nations worldwide have consistently been facing is that
this crucial non-renewable energy resource is scarce and is concentrated in a few
countries/regions of the world. The surplus production capacity of petroleum is largely
concentrated in the Middle East and West Asia. This imbalance in distribution has serious
implications on the growth as well as energy security of the countries that are not selfsufficient
in terms of indigenous production of petroleum and are largely dependent on
imports from the aforesaid regions to fuel their economies. The oil crisis of 1973-74 bears
ample testimony to the severity of the problem underlying this imbalance in supply of oil.
APM: Evolution, Rationale, Functioning and Limitations
Evolution of APM: Brief History
Up to 1939, there were no controls whatsoever on the pricing of petroleum products.
Between 1939 and 1948, the oil companies themselves used to pool accounts for major
products without any intervention by the government. However, since independence, the
pricing of petroleum products in India has persistently witnessed several structural changes
in policies. In 1948, an attempt was made to regulate prices through Valued Stock Account
procedure. This was basically a cost plus formula based on import parity to which were
added all elements of cost such as ocean freight up to Indian ports, insurance, ocean loss,
remuneration, import duty and other levies and charges. The realization of oil companies
under this procedure was restricted to the import parity price of finished goods plus excise
duties/local taxes/ dealer margins and agreed marketing margins of each of the refineries.
Any realization in excess of the normal was surrendered to the Government.
Given the huge outgo of foreign exchange on imports, the government from time to time
appointed a number of committees to examine or re-examine petroleum pricing. The first
such committee, headed by K.R. Damle, was constituted in the early sixties. The Committee
examined the issue of foreign exchange conservation, particularly as the refining and product
imports were in the hands of foreign oil companies and proposed incentives for the oil
companies to increase gross profits by lowering their operating and other costs. It also
recommended for reduction of discounts from the Free-On-Board (FOB) prices. Platt’s Oil
Gram was considered as the reference to fix the FOB prices. Furthermore, in view of the
multiplicity of products and their usage, lubes and greases were kept out of the pricing
formula, which had been essentially applied to bulk products. For lubes and greases the
committee recommended a block control system under which a ceiling was fixed for
blending charges, packaging and marketing costs and profit margins. Appendix 1 provides
information on the major refined petroleum products and their usage.
The Dismantling of the APM
In the light of these concerns that were raised against the APM regime, the government
finally announced the complete dismantling of the APM on 21st November 19974 which was
to be carried out in a phased manner over the period 1998-2001, beginning 1st April 1998.
The highlights of this policy of dismantling are as follows:
• Cost plus formula withdrawn: The cost-plus formula would be withdrawn for
indigenous crude producers (ONGC and OIL). The oil products would be given 75
percent and 77.5 percent of the weighted average FOB price of actual imports for
1998-99 and 1999-00 respectively. This would gradually be increased to 100 percent
by 2002.
• Retention pricing abolished: The system of retention pricing would be abolished
for all (existing and new) refineries from 1st April 1998 and the pricing of petroleum
products at the refinery gate prices of the controlled products viz. petrol, diesel,
kerosene, ATF, and LPG would continue to be controlled during the transition
period. Some subsidy on LPG would be retained and borne by the oil companies
while subsidy on kerosene would be borne by the fiscal budget. The prices of the
decontrolled petroleum products namely naphtha, furnace oil, LSHS, LDO(light
diesel oil), paraffin wax and bitumen, would be market driven and suitably adjusted
to reflect the prevailing market conditions.