[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]I[/dropcap]n a matter of months, the price of a barrel of crude has come down from $100 to $29 and yet, the prices at the pump have barely budged. Petrol costed Rs.73 a liter when crude was $100 a barrel in June 2014 while it is still Rs.60 a liter when crude has come down by 75%! To understand the pricing, see the chart below. I am only comparing the costs in United States (US) and India for now. Europe falls in-between but closer to the US price.
Cost at the pump comprises of four parts:
- Price of Crude: This should form the bulk of the price. 1 barrel of crude is 159 liters.
- Refining costs: The cost it takes to convert Crude to Refined petrol. Typically it is between 5-10% of the total cost.
- Excise and Taxes: This is the component that each government (Center and State) controls. More about this later.
- Transport and Retail: This is the cost it takes to transport refined product plus the retail profit margin.
[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]I[/dropcap]n the US, the price of crude is the major price component, on an average 75% of the total price. In India, it is not so clear. With all the subsidies and excise duties, things are a bit more complicated. Let us calculate the price of 1 liter of Petrol in June 2014 and now.
1 barrel of crude = 159 liters, was $100
The Dollar-Rupee exchange rate was around Rs.60.
The cost of 1 liter of crude works out to (100 * 60) / 159 or Rs.37.
The price at the pump was Rs.74, a 100% markup over the crude price.
We want to compute roughly what the Excise/ Tax duty was in June 2014. Assuming an 8% overhead for refining costs and 4% for transport and 2% for retail (which is pitiable because they are the one who get an earful from the consumers), the tax component was 36%.
1 barrel of crude = 159 liters, is $25
The Dollar-Rupee exchange rate is around Rs.67.
The cost of 1 liter of crude works out to (25 * 67) / 159 or Rs.10.5.
The price at the pump is Rs.60, a 600% markup over the price of crude!
Assuming the same 14% for other overheads, the Excise/ Tax duty today is a whopping 70%!
[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]W[/dropcap]hat could be reason for the government to tax the common man so much? After all, lower petrol prices are akin to a tax break and also form the bedrock of commodity prices. A lower petrol cost would lower the price of essential commodities including food items. This in turn would increase the savings rate, which would find its way back to the government via the banks. All the Prime Minister has to do is explain this in his Mann ki Baat program and I am sure the people will save instead of buying luxury goods. Will he?
1. The graphic is interactive. If you hover over it, you can find additional information.
2. Text in Blue points to additional data on the topic.