Relevance: GS-3: Effects of Liberalisation on the Economy; Infrastructure: Energy.

Key Phrases: Fuel inflation; Jiobp, Nayara, Shell; OPEC; APM; Market-linked fuel pricing;

Context

• The rising uncertainties due to the Russia-Ukraine War have caused fuel prices to increase substantially.
• This development will continue to ensure that Oil prices remain up. Their price rose due to a peak in demand (post the pandemic) and the refusal of OPEC nations to increase the supply.
• But, such a high increase in price also increases the uncertainties prevailing in the minds of Private Fuel Retailers like Jiobp (of Reliance), Nayara and Shell.

Key Highlights

What is market-linked fuel pricing?

• The prices are decided by market forces and government intervention has been reduced to a minimum.
• Government can impose taxes (Like Excise and VAT).
• Currently, this pricing method has been in practice in India
  • Petrol and diesel rates are revised at 06:00 a.m. every day.
  • Before this prices were revised every fortnight.

What is administered mechanism of fuel pricing?

• Under this method, the price of the fuel is fixed by the Government on the basis of some parameters.
• Although it might be beneficial for the consumers, it becomes counterproductive for the retailers as the economic interests of the companies are not given priority.

Evolution of Fuel Pricing regime in India

• Policies have introduced market-linked fuel pricing twice and reverted to an administered mechanism twice.
• Before 2002, Administered Price mechanism (APM) dictated the fuel pricing.
• A more liberal approach was adopted in 2002 which welcomed private fuel retailers like Reliance and Essar group. This was followed by a massive expansion of the fuel business with retail distribution licences given to public sector Oil and Natural Gas Corporation, GAIL and Oil India.
• In 2008, due to Global Financial Crisis and the subsequent recession, the Government reverted to the APM method of fuel pricing.
  • Global oil prices touched $147 a barrel, with petrol prices at private outlets shooting up by as much as ₹ 6 a litre and diesel by ₹ 14 a litre.
  • This fixing of prices hurt the balance sheet of private fuel retailers.
  • State-run retailers were compensated.
  • In March 2008, RIL announced the shutdown of all its 1,400 retail outlets.
• In June 2010, the government decided to free petrol pricing again.
  • Prices of diesel, the fuel most widely used in transport, were freed in October 2014.
  • These moves stoked foreign interests with investment from
    • Russian giant Rosneft led a consortium that acquired Essar Oil´s Vadinar refinery, 3,500 retail outlets, a power plant and a port for $12.9 billion in 2018. Since then, it started expanding its retail presence by almost doubling it.
    • In 2020, UK´s BP paid Reliance Industries $ 1 billion for a 49 per cent stake in a fuel retail joint venture, forming Jiobp.

The recent challenges for Private fuel retailers

• In Nov 2021, the Government chose to freeze petrol and diesel prices for 137 days preceding elections in 4 states.
  • This was allowed to increase incrementally (at a slower rate).
• The Russia-Ukraine war has again provided scope for Government interventions.
  • As crude prices crossed $120 a barrel, impacting inflation even further, Finance Minister announced on May 21, 2022 a cut in excise duty on petrol by ₹ 8 a litre and diesel by ₹ 6 a litre.
    • State-run oil marketing companies continued to hold prices.
    • This put additional pressure on the private sellers.
    • Jiobp revised the retail selling price of petrol and diesel by a nominal amount of ₹ 7 per litre and ₹ 5 per litre respectively to support both customers and channel partners.
    • This has caused sales of state-run companies to increase by 42% (diesel) and 44% (petrol). (June 2022 vis a vis 2021)
• According to an industry source, as of June 16, industry losses were ₹ 19.7 per litre and ₹ 31.9 per litre for petrol and diesel, respectively.
• According to a Nayara spokesperson, the largest private-sector fuel retailer suffered a loss of close to ₹ 700 crores in June alone.
• Another industry source pointed out that Jiobp held back a price increase over the prevailing retail selling rate even at the cost of losing over ₹ 1,500 crores since February 2022.

Repercussions

• The private retailers have had to reduce their supply in different States causing fuel supply shortages in the States: Madhya Pradesh, Rajasthan, Karnataka, Tamil Nadu, Chhattisgarh, Odisha and Kashmir.
• These shortages can stall the Post COVID recovery.

Conclusion

• Necessary steps must be taken to relieve private fuel retailers of the recent problems. The procurement of cheaper Russian oil can be a boon in this regard. This will be crucial in maintaining the ‘ease of doing business climate and achieving a conclusive recovery to become a $5 Tn Economy.

Source: Business-Standard

Mains Question:

Q. Government policies regarding fuel pricing have thrown new challenges to Private Fuel retailers and this has a detrimental impact on the economy. Elaborate and suggest measures to deal with the recent problems being faced by the private fuel retailers.