The Hindu Business Line : Govt moves from import to trade parity price regime for petrol, diesel

What it means
The impact of this move would be marginal since refineries offer a 40 per cent discount on import and export parity differential.
The transition and cut in Customs duty will impact the gross refinery margin of refiners by $1.7 per barrel.
The total impact of Customs duty reduction and shift from import parity to trade parity would be Rs 6,500 crore.

New Delhi , June 26

With effect from June 16, the pricing model for petrol and diesel has undergone a change, with the Petroleum Ministry deciding to migrate from the existing import parity regime to a trade parity regime.

The trade parity price in effect would mean that the integrated refiners - Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum - and standalone refiners such as Reliance Industries, Mangalore Refinery and Petrochemicals may take a marginal hit in their gross refinery margins (GRM) as the refining transfer price would be reduced.

The refinery transfer price (RTP) is the price at which oil marketing companies (OMCs) lift products from the refineries. Under the trade parity model, the weighted average of the import and export parity prices is taken in the ratio of 80:20. In trade parity, pricing is lower than the import parity to the extent of freight cost and other taxes and duties.

Pricing mechanism

The import parity pricing mechanism forces firms to pay Customs and ocean freight for the entire purchase.

Though the new mechanism was adopted on June 5 when the recent price hike on petrol and diesel was announced, it has come into effect only from June 16 following a formal notification by the Finance Ministry reducing Customs duty on the two products from 10 per cent to 7.5 per cent.

A reduction in Customs duty on petrol and diesel formed part of the package approved by the Government to help oil companies cover their under-recoveries due to the surge in international crude prices.

The transition

According to IndianOil sources, the impact of this move would be marginal since the refineries offer a 40 per cent discount on the import and export parity differential. The transition from the import parity price regime to trade parity price and cut in Customs duty will impact the GRM of refiners by $1.7 per barrel. Since the refineries had offered a 40 per cent discount on the import and export parity differential, resulting in a discount of $1.5 a barrel last year, the net impact on the GRM of oil marketing companies was estimated to be 20 cents per barrel for this financial year.

The total impact of Customs duty reduction and shift from import parity to trade parity would be Rs 6,500 crore (Rs 4,100 crore for the former and Rs 2,400 crore for the latter).

Apart from the duty reduction, the Cabinet had recently decided on an integrated package involving a price increase in petrol and diesel, issuance of oil bonds worth Rs 28,000 crore, limiting PDS kerosene supply to only below poverty line families, and moving to a trade parity pricing mechanism for petrol and diesel to bail out the bleeding OMCs.