Secret of Oil Price Calculation in India Decoded

14 January 2015

Secret of Oil Price Calculation in India Decoded

Greetings from Hitesh! With the Crude price going down every day, I am receiving requests from my regular reader to talk about the impact of the same in Indian Oil Prices and Indian Oil Manufacturing Companies. Well, let me start with Oil Price Calcualtions.

	How Oil Price is Calculated in India?
Sr. No	Details	Scenario 1	Scen  2	Scen  3	Scen  4
1	Per Barrel Price  in USD	40	60	70	100
2	USD Rate ( for calcualtion sake assumed)	63	63	63	63
3	Rate India	2520	3780	4410	6300
4	Per Liter price of Petrol ( 1 barel equals to 159 ltr)	15.85	23.77	27.74	39.62
5	1 ltr petrol needs .86 ltr of crude ( so net price will be)	13.63	20.45	23.85	34.08
6	Crude to Petrol conversion cost with Transportation per ltr	6.00	6.00	6.00	6.00
7	Cost after conversion cost	19.63	26.45	29.85	40.08
8	Central excise / custom Duty 25%	4.91	6.61	7.46	10.02
9	Price after central taxes	24.54	33.06	37.32	50.09
10	State Tax like VAT  - average 25%	6.13	8.26	9.33	12.52
11	After VAT	30.67	41.32	46.65	62.62
12	Petrol price in India	64	64	64	64
13	Excess Price Charged by Oil Companies	-33 .33	-22.68	-17.35	-1.38

As seen above oil prices after conversion cost / central and state taxes is lower by Rs.1.38 to Rs.33 when compared with the petrol prices charged in India which is Rs.64 at this moment of time.

What Happens In Reality?

Oil supply contracts are entered for a long term say one year to 5 years and mostly the average price will be around USD 70 per barrel. So, effectively the petrol prices should be Rs.46 to Rs.47 and it may not come down much due to fall in Crude Prices in International market.

How Profit GAP of Rs.17 is used by Govt?

As seen above there is a GAP of Rs.17, if we assume our crude price is USD 70 per barrel.

It is very difficult to categorically ascertain how Rs.17 will be used by Govt in NEXT Budget. But it will be surely used to provide cushion to reduce Fiscal Deficit by Finance Minister.

What is our call on Oil Mkt Companies and Oil Manufacturing Companies?

Both the categories of the companies are controlled by Govt policies and Govt policies keeps on changing from time to time. Moreover, they are affected by International crude prices and USD exchange rates.

This makes it difficult to forecast the reasonable long term scenario of these companies!!

We simply avoid these sectors from our investment radar.

What Next?

Today news papers have report that India is preparing for WAR with PAKISTAN. We were the first to write about World War 3 way back in June 2014 and about Pakistan in Dec.,2014 last week when we were writing about 2015 outlook.

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Hitesh Parikh.