Fuel price hike: Indian Oil responds to tough questions
New Delhi: With petrol and diesel prices across the country having skyrocketed to historic highs, Sanjiv Singh, Chairman of the largest fuel retailer Indian Oil Corp (IOC) today faced a barrage of tough questions from the media during a press conference on the company’s fourth quarter results. ETEnergyWorld compiles the top highlights of the interaction. Edited excerpts..
Was there a directive by the government to OMCs on controlling fuel prices before Karnataka elections? What is the reason why prices were not changed for 19 days before the Karnataka elections?
There is no directive from the government as far as fuel prices are concerned. Regarding the 19 days price freeze as you all are well aware Indian retail prices follow the last 15 days of global fuel product prices and many a times product prices, although invariably move in tandem with global crude prices, move differently and not in sync with global crude prices as it is governed by its own demand and supply environment. If you recall, during that period price spikes were happening on a daily basis and it was quite likely that prices would not go up in the same way. So, we decided to moderate the prices for a reasonable period. Subsequently, we saw that there were other geo-political developments which could not be ignored and which became the primary reason leading to the increase in global crude as well as product prices which are now moving beyond anybody’s expectation. That is why you see the daily increase taking place now.
Were there political compulsions which led to OMCs freezing fuel prices and attributing it to change in market fundamentals?
Kindly understand (the situation) and look at the margins. This business comes from very low margins. So, such moves cannot stand. There are factors which are governing the international prices of products as well as crude. While everyone looks at the crude prices, India’s domestic retail prices are governed by the international product prices, which will give you a better picture of what is happening.
How has the price hike impacted the profitability of the company?
On a day to day basis it is difficult to assess the impact. We do it on an annual basis. In a business like ours, profits are predominantly decided by physical performance and cracks which are available. So, a day-to-day analysis of the impact on profitability will not give a correct picture.
Was there any communication between the government and the company on raising or not raising fuel prices during the Karnataka elections?
We deal with the government on a daily basis. We discuss these issues day in and day out. Do not think the pricing in the retail market is an issue only for the customer. It is an equally important issue for the country and for the masses. The company cannot run or operate if the prices are not matching with the proper prices. We are working in a free environment where prices have been de-regulated. There are no under-recoveries for these products. There is a formula laid down as guidance for deciding retail prices and we are working based on the formula.
There is a directive from the government to change fuel prices daily based on crude oil prices. By not changing fuel prices before the Karnataka elections, have you violated that directive?
The government has given us the freedom to revise prices on a daily basis. There is a formula based on which we work out these prices. We are still following the same formula. As I said earlier, we took a call as we believed that the trends which were happening were not supported by fundamentals. Even today, if you remove the issues, then fundamentals will suggest a different price of crude in the international market. But today there are other factors which are influencing the market. The prices are de-regulated and we are free to choose the price. If there are 6-7 retail players in the market, a company cannot decide to change prices on its own as there is always a fear of losing market share. It is a complex issue. We took a call to freeze prices expecting prices to fall in the future. There is no instruction (from the government) and we are free to choose retail prices. Many a times we may decide to sell at a lower price. It is the company’s call. However, the company on a prolonged basis cannot sell on a lower price. Profits or loss of a company in not solely dependent on the marketing margins and there is a complete chain which impacts the profit-loss situation.
The reason you gave for freezing fuel prices was that the changes in international fuel prices were not backed by market fundamentals. However, prices of fuel were changed on a daily basis from the next day of Karnataka elections getting over? Can you explain what has changed?
You are only looking at the India level. Kindly look at what was happening in the international level and you will get the answer. If you track the crude prices and diesel prices in the international market during that period, you will get the answer because there was no indication of prices going down. So, we had to increase the prices. Had Iran (sanctions issue) not happened, the situation would have been different. That is all that I am saying.
When can we expect prices to go down?
Domestic prices are based on international product prices. We do not know when prices can go down considering the recent geo-political activities.
Prices before the freeze used to increase by 10 to 15 paise per liter. However, after the Karnataka elections, we are witnessing prices of fuels being increased by almost 30-35 paise per liter? Is the company passing on the extra hike which it could not before?
We need to understand two things here. Retail fuel prices follow the trailing 15-day international product prices. So, if prices do not change in the last two or three days you will still see a change in domestic retail prices. Secondly, in the last month crude has shot up and breached $80 per barrel mark. Please understand that the spikes in international product prices have also sky-rocketed so we have no choice but to pass on the increase to the consumer.