Real culprits behind Fuel Price Hike

The following article analyses the real reasons behind the recent petrol price hike by over Rs. 7.54 in India which was the largest ever seen in recent memories. The hike, while only benefiting the oil companies and shareholders, was met with shock across most parts of India that saw protests everywhere and also a Bandh on 31st May that saw many parts of the country shut down. While the opposition parties may have scored a few brownie points against the ruling Congress party, but the role of the BJP during its reign at the Centre (1998-2004) that saw changes in the way petroleum based products are priced is also a causative factor for the increase in fuel prices today, which cannot be ignored. Nor can one ignore the role of the state governments in not containing the fuel price.

Hoax of Petrol subsidy

Reasons being cited by the government and OMCs (Oil Marketing Companies) for hiking petrol prices are – huge losses incurred by these companies on account of selling petrol, diesel at lower prices, huge stress on import of crude oil following depreciation of rupee and worsening fiscal and current account deficit caused by government heavily subsidising these products. Armed with these arguments the hike in fuel prices is claimed as inevitable and unavoidable. A close scrutiny of these claims however shows a different picture.

First of all very statement of petrol being subsidised in itself is a big lie. Is the cost of production of a litre of petrol really higher than its selling price? Below calculations reveal its production cost is merely Rs. 40.6 (on average). Now when price of crude oil in international market has come down from $107 in March to $90 today, cost of a litre works out to be merely Rs. 38.4, less than half of its selling price.

Processing crude oil->
Crude Oil -> Refining -> Petrol -> Refining margin, Transportation, vendor commission = Production cost of Petrol
(1 barrel of crude oil yields 150 litre of petrol)
Average value of dollar this year (Jan to May) = Rs. 53.34
Average price of crude oil barrel this year = $101.46
Refining, margin, transportation, commission per barrel = Rs. 672 (approx $12)*
150 litre of petrol = 101.46 × 53.34 + 672 = Rs. 6084
i.e. 1 litre of petrol = 6084 / 150 = Rs. 40.6
The cost depends on factors like quality of crude oil, refinery. However changes in it would not greatly affect product price.

Thus there is absolutely no subsidy on petrol either by government or OMCs. In fact exchequer mops up revenue worth billions from various taxes levied on petroleum products. Last year its contribution to tax revenue was as much as Rs. 1350 billion.

Another reason cited much more often is the heavy losses incurred by OMCs. On 24th May, a day following fuel price hike OMC’s like BPCL declared its annual results soon followed by IOC on 28th May and HPCL just a day after. Forget losses, these companies are among the highest profit making companies in the country. Their FY12 (Jan to March 2012) Q4 profits have in fact tripled or quadrupled from last year.

Company Q4 2011 Q4 2012 Profit growth
IOC 3905 12,670 224%
BPCL 935 3962 324%
HPCL 1123 4630 312%

*Figures in crore rupees

Depreciation of rupee and alleged strain on the cost is another flimsy claim. After reaching its peak at $114 in August 2008, prices of crude oil have been going down. Especially in last one month they have fallen from $104.93 (on 27th April) to $90.86 (on 25th May last week). It has offset any cost impact caused by depreciation of rupee.

How come big figures of losses incurred by OMCs are being touted? That’s the crux of the matter. India import crude oil and not petrol. Latter is fully refined in the country in refineries owned by public sector OMCs while that of private OMCs is exported. However following policy change in 2002 companies baseline their prices not on production cost but on import parity. Fictitiously assuming petrol has been imported (at Singapore market rate MOPS95) and then fictitious duties, insurance and freight is levied on it. The difference between import parity price thus (fictitiously) determined and actual selling cost is termed as under-recovery. For eg., if import parity price is Rs. 90 and a liter is sold at Rs. 80 then Rs. 10 is the under-recovery!

What about Working People’s under-recoveries?

If this is model that is being followed for petroleum based products exclusively, then why not universalise it for all other commodities? For example this year the price of cotton in international market has been around $1 per lb making it Rs. 12,000 per quintal. But the Indian peasants are being paid a miserable Rs. 3000 (that at times doesn’t even cover production cost). Following import parity pricing model here and without even levying fictitious duties, freight, insurance etc., the under-recovery turns out to be Rs. 9000 per quintal. Is government contemplating on compensating the Indian peasants for this? While it’s heart bleeds at under-recoveries of profit making companies, there is not even a drop of tear shed on the deaths of hundreds of thousands of peasants in rural India.

And what about the under recoveries of the Indian workers? If they want to match fuel prices to international level, why not also match their minimum wages to that level? In Britain, for eg., minimum wage per hour is 6.19 GBP, which is low for that country (with petrol at 1.25 GBP per liter, one can buy 5 liter in an hour’s wage). With an 8 hour working day and 22 working days a month, monthly wages turns out to be 1089 GBP translating into Rs. 92,602 (with 1GBP = Rs. 85 ). Even if one assumes minimum wage in India at Rs. 7000 (in reality it’s much lesser), there is an under-recovery of Rs. 85,000 per head!

Real Culprits

Thus in reality, the Indian working people are already being made to pay much higher than the actual cost of petrol. With production cost of Rs. 40, OMCs are making astronomical profits and they are crying hoarse over fictitious notions of under-recovery. It is a daylight robbery on the nation as a whole and all of its working masses (akin to East India Company). Who are the real culprits? Government and OMCs are only part of the answer.

One needs to dive deeper to find out the real culprits behind this crime. First of all what are OMCs? Understanding their nature and changes to their structure in the past 2 decades holds the key to the issue at hand. Though IOC (Indian Oil Corporation), BPCL (Bharat Petroleum Ltd) and HPCL (Hindustan Petroleum Limited) are government enterprises, they are indeed companies listed on stock markets and a cursory glance at its share holding pattern is an eye opener.

Company Govt Private
IOC 78.92% 21.08%
HPCL 51.11% 48.89%
BPCL 54.93% 45.07%
ONGC 69.23% 30.77%
GAIL 57.34% 42.66%
Oil India 78.43% 21.57%

With the advent of capitalist globalisation, meant that Indian economy embraced neo-liberal reforms in 1991 . Under capitalism, the sole objective of any productive process is solely profit. This profit is distributed amongst its shareholders. Higher the profit, higher are the returns in the form of dividend. In accordance with this, the OMC’s were part-privatised through disinvestment. With privatisation, these companies openly embraced the naked principle of profitability. To facilitate this, in 2002, Administrative Price Mechanism was replaced with Import Parity Pricing.

Even though government is still the major stakeholder, private investment mandates its functioning independent of any government control. This is the precondition for the investment of private capital into any enterprise. Keeping this mind, the government only wants to further disinvest its stake. All talk of consultations of company executives with the government before any proposed price hike is just to keep ‘reaction’ in check.

Significant portion of the profits earned by OMCs is distributed to these private investors. It includes mutual funds, insurance companies, domestic and foreign institutional investors and also other government companies that have cross-invested into each other. Last week declaring its annual results BPCL announced 1:1 bonus share to its investors and a dividend of Rs. 11 per share. The company has 12,49,88,043 shares held by private investors implying total dividend paid to them at Rs. 1 billion 38 crore. Below table shows dividend paid by PSU Oil companies in 2009-10 and share of private investors in it.

Company IOC ONGC GAIL Oil India
Dividend 31.81 bn 70.58 bn 9.51 bn 8.18 bn
Private Investors 6.71 bn 21.72 bn 4.06 bn 1.76 bn

*Figures in billion rupees

Matching fuel prices to global level translates into soaring profits to the private investors. That’s the real game. It must be noted here that ONGC is the highest dividend paying company (higher than Reliance) in the country and 30.77% of it is awarded to private investors.

Now this is just the first part of the story; second part is even more scandalous. One can see monopoly of public sector OMCs (IOC, HPCL, BPCL) in petrol, diesel retail market. Private sector giants like Reliance, Essar (domestic) or BP, Shell (global) have an insignificant presence. Now it is worth pondering upon how come such a profitable sector as oil marketing is not monopolised by private entities while everything from Education to Health service is? As prices of fuel in India are lower than global level, these companies do not venture into the domestic market. However India’s petroleum retail market is obviously too big to ignore. In fact these companies desperately want the market to be opened up and matching of prices to global level is the prerequisite so that they don’t have to compromise on their profits. It provides an investment opportunity worth hundreds of billions and corresponding profits.

As illustrated above, it is vested interests of private investors or private capital that is at the root cause for the hike. It is essentially these interests that unleashed treacherous and the scandalous propaganda calling for complete deregulation of petrol and diesel prices. An army of sundry pundits, economists and journalists on the payrolls of these corporate giants has been deployed both nationally and internationally towards this end. The Economist, Finance Times, Wall Street Journal along with their juniors in Indian media launched venomous attack calling for opening up the Indian market. While we could see higher degree of aggression in global media, domestic ones used different tactics. Consciously concealing the truth, they painted a sorrowful and a miserable picture of ‘government’ companies ‘bleeding with heavy losses’ standing on the verge of doom and thus pleading price hike to keep them afloat. Many of them extended passionate appeals calling upon masses to swallow the ‘bitter pill’ of price hike to salvage the economy or nation as a whole and thus to stand up for the occasion.

A gloomy picture in global economy coupled with acute crisis in Eurozone has led to foreign capital inflows to India drying up. Subsequently the economy, captive of hot speculative capital saw growth rate plummeting from 9% to 6.9%. With India’s quarterly growth rate at just 5.3%, the Indian government is more than ever desperate in seeking foreign investors and latter has been ably arm twisting the former to make terms of investment yet more favourable. Succumbing to this pressure, government has yielded by its discreet nod to fuel price hike.

The Central Role for the Indian Working Class

Under capitalism, private capital is the supreme authority and State is just an instrument to further its interests. In modern democracy, this responsibility is vested upon ruling party. In its rule of over past 8 years, Congress led UPA government has truly lived up to this expectations by honestly serving the interests of private capital. Release of Nira Radia tape saw Mukesh Ambani honestly acknowledging ruling party’s contribution by commenting ‘Congress to apani dukan hai’ (Congress is our shop). However BJP staging fake protests at petrol hike is no different. It was Vajpayee led BJP government that in 2002 dismantled Administrative Pricing Mechanism (APM) only to be replaced with import parity pricing and current fuel hike is merely a logical outcome of this decision. In fact the party, dominated by Brahmins, Baniyas and other upper caste trading communities, having an outright monopoly over private capital is only the natural expression of their interests. On the other hand, while the CPI-M, CPI rightly attack import parity pricing, but they have lost credibility by its collusion with capitalists; Singur and Nandigram being only its visible manifestations.

The situation is alarming. Petrol prices have been hiked and deregulation of diesel is just round the corner with domestic gas price hike in waiting. All of this is bound to wreck havoc. With persistent calls for further disinvestment of public sector, OMCs are pouncing hard demanding more flesh and blood. And all this so that astronomical amount of capital they have accumulated could be invested and they could reap higher profits from it. That is the real story behind petrol price hike.

The capitalist class and State would like to seek solace in the fact that previous petrol price hikes saw only sporadic protests and outbursts from masses without culminating into any big sustained campaign against it. But this solace may be short-lived. Nationwide bandh on 31st May gave a glimpse. With economy plunging into what could be a drawn out crisis, it is going to be increasingly difficult to sustain the illusion of growth. With massive unemployment among youth and steadily rising prices, mass discontent is brewing up. Frequently rising fuel prices are only going to fuel it to a flash point. Worst effects of global recession saw European continent witnessing naked class warfare on its streets and it may not be too long before this reaches India!

WE DEMAND:

  1. Immediate scrapping of import parity pricing to be replaced with production cost based model.
  2. Re-nationalisation of public sector OMCs both upstream (ONGC, GAIL, OIL) and downstream (IOC, BPCL, HPCL)with zero percent private investment, under democratic worker’s control and management.
  3. Nationalisation of private Oil companies including Reliance, Essar, Cairn Energy without any compensation, under democratic worker’s control and management.
  4. Scrapping all tax soaps extended to capitalists that creates a big hole in public revenue (worth Rs. 5.5 lakh crore last year)
  5. Building a sustainable public transport system that would considerably cut down usage of petroleum products and related air pollution. Expenses to be funded by levying heavy taxes on cars and other private vehicles
  6. Immediate 50% Tax on cash pile and corporate wealth to bring down the prices and to pay for fiscal deficit
  7. For full nationalisation of banks and key industries; for a democratic workers control and management of all the resources.
  8. For a new mass workers party that would genuinely represent the interest of the working masses

Youvraj B

Pune