Petroleum pricing needs reform and transparency

CAG in its recent report said fault in fixing price gave oil firms Rs. 50,000 crore gain
 Contrary to the popular belief that oil marketing companies (OMCs) make huge losses on sale of petroleum products that are subsidised by the government, the audit watchdog Comptroller & Auditor General (CAG) of India claims they have made gains worth ` 50,513 crore between 2007 and 2012.
According to CAG, “The present pricing mechanism of major petroleum products provides for a higher compensation to the refiners. This has not translated into technical advancements and efficiency of the PSU vintage refineries to the desired level. The pricing policy also benefitted private/stand alone refineries by way of compensation for domestic supplies lo OMCs at rates higher than their export realisation.”
It adds, “OMCs have been unable to control their marketing expenditure lo remunerative levels impacting profitability. However, the manner and time frame in which the compensation pertaining to under-recoveries was being received adversely affected cash flows of OMCs along with attendant ill effects.”
The pricing mechanism, including notional import related expenses such as freight, insurance, custom duty etc are not actually incurred in production of refined products in OMC refineries. However, being included in the pricing methodology or price build up, they form part of the refinery gate price (RGP), which refineries are compensated.
“Addition of these notional elements had the effect of increasing the refinery gate prices for refined-regulatedproducts processed in OMC refineries by  Rs.  50,513 crore,” said the CAG.

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