Why competition fails to cut petrol price

Despite six major firms selling fuel and govt easing entry barrier, price remains the same across sellers and differs state-to-state

On October 29, a petroleum retail dealer of Reliance Industries (RIL) sold petrol at ~70.41 a litre in Jamnagar in the coastal state of Gujarat. This is also the hub of petroleum production in the country. The same day, another RIL retailer sold petrol at ~78.87 in Patna. This price differential — induced by taxation — is the same for retail outlets of Indian Oil Corporation (IOC) that sold petrol for ~70.31 in Jamnagar and ~78.78 in Patna.

Despite six major companies currently selling petrol and diesel in the country, price levels for these products remain the same across sellers and differ only according to states. With the government last week easing the entry barrier for petroleum retailing by doing away with the ~2,000-crore mandatory investment requirement, more companies are likely to invest in this business.

The pricing levels, however, would remain the same primarily for two reasons. Price across the value chain, including that of crude oil, a major cost component, is marked to global rates. Government-owned oil-marketing companies benchmark the retail prices of petrol and diesel to the 15-day average of the Arab Gulf price, which is why the base price remains the same for these companies.

The other reason is that a large chunk of effective retail price comprises taxes which are levied equally on fuel sold by all companies. The Delhi retail price of petrol, for instance, is almost 49 per cent excise and value added taxes. This leaves little scope for sellers to manoeuvre retail price.

Deepak Mahurkar, partner and leader, India oil and gas industry practice, Pricewaterhousecoopers, however, said mark-ups are expected to lower, and reducing cost to service will become the focus for suppliers. “Significantly, the consumer in this segment never sees the product or feels. Therefore, customer service and product prices are very important to compete. With more choices, competition is bound to set in,” he adds.

An IOC executive, however, said private retailers cannot sell at rates more than that of public sector undertakings (PSUS) because in that case, consumers would not buy from them. “Competition should have ensured private companies that claim more efficient crude oil procurement and refining should have been selling at lesser rate. This, however, has not happened,” he said.

Now, the scope of competition among non-psus hotting up is likely to increase, with more private companies coming into the market. But, there is also likely to be wooing of dealers in lucrative markets, which means that the commissions being offered to them goes up.

Mahurkar said the earlier ~2,000crore investment requirement helped in two ways. At that time, India needed crude refining and exploration investment. “Therefore, to attract investment, offering lucrative retailing was the purpose. Also, retail is a socially sensitive segment. Authorising only serious private investors was necessary to supply with responsibility. Shell, BP, Haldia, Nayara, and now Total could qualify,” he said. The retail sector developed well when needed, including in remote areas owing to entry barrier protection provided to oil companies. Also, the government could pass on subsidies through PSUS unhesitatingly.

“Now that attracting investment and capacity creation is not an issue any more, the need to open up the sector was felt by the government leading to various actions since 2002, like price decontrol and a significant one now of lowering the entry barrier,” said Mahurkar.

The new criterion of ~250-crore net worth ostensibly is different than the old one of qualifying serious and heavily invested in India players. “The government now wants to ensure uninterrupted consumer supply. Being a sizeable investment and a long supply chain, only those who can fund operations should enter,” said Mahurkar. The retailers and dealers invest upfront in land, construction of storage, forecourts, dispensers, and safety provisions.

Russian state- owned Rosneft-promoted Nayara Energy, which is the largest fuel retailer with 5,128 outlets, for instance, states on its website that apart from the cost of land, the average investment in an outlet ranges between ~70 lakh and ~1 crore, depending on the size of the retail outlet and the services provided.

Mahurkar also pointed out the government wants to ensure safety, prevent adulteration and pilferage, and ensure quality and quantity through regulations and standards. “In an open market, these aspects get better due to competitive pressure, too.”