India needs a clear, rules-based framework for petrol prices, Pg12

Key Highlights:

• India's petrol and diesel pricing operates in a hybrid system between market pricing and government control, leading to opacity and instability.
• From 2022-2025, despite crude oil prices dropping from $99 to $68 per barrel, tax collections on petrol and diesel increased from Rs 5.24 lakh crore to Rs 6.31 lakh crore.
• Oil marketing companies (OMCs) reported profits of Rs 83,000 crore in 2024 and Rs 50,000 crore in 2025, while consumers saw no reduction in pump prices.
• Rising crude prices and geopolitical tensions are causing OMCs to report losses of around Rs 20 per litre on petrol and up to Rs 100 per litre on diesel.
• The author proposes a Fuel Price Transparency Framework (FPTF) to link pump prices directly to oil prices, exchange rates, and taxes.

Detailed Insights:

• Before 2010, India used the Administered Pricing Mechanism, where the government fixed fuel prices, often below cost, compensating state-owned firms through subsidies and oil bonds.
• Reforms started in 2010 with the deregulation of petrol prices, followed by diesel in 2014, and daily price revisions in 2017, but the government retained indirect controls.
• The current system allows the government to increase taxes when crude prices fall and pressure OMCs to absorb losses when crude prices rise, preventing consumers from fully benefiting from market changes.
• The proposed FPTF would calculate pump prices based on crude oil prices, exchange rates, ethanol blending costs, refining costs, and a clear tax band, with regular revisions.
• The FPTF aims to improve efficiency by aligning prices with market signals, prevent asymmetric gains, and protect oil firms from sustained losses through transparent pricing.
• India needs a three-part energy security strategy: adopting the FPTF, securing long-term crude contracts with reliable suppliers, and investing in domestic oil exploration.
• Transparent pricing and diversified supplies are essential for India’s macroeconomic stability, given that it imports nearly 90% of its crude oil.

Key Concepts Involved:

• Administered Pricing Mechanism: A system where the government controls and fixes the prices of goods, often deviating from market rates.
• Fuel Price Transparency Framework (FPTF): A proposed system linking pump prices directly to crude oil costs, exchange rates, company margins, and taxes.
• Ethanol Blending: The practice of mixing ethanol with petrol, aimed at reducing emissions and dependence on imported oil.