How to calculate your Petrol and Diesel prices?

In 80s and early 90s, Petrol and Diesel prices were determined once every year just like budget is presented once a year. Cut to 2012 we had Petrol and Diesel prices were aligned with international crude prices and were altered once in 15 days. The average crude oil price of 15 days before was taken as bench mark to determine the prices for next 15 days. That created a lag of upto 30 days and that created lot of ups and downs as Crude was very volatile. This prompted the policy makers to come up with daily alteration of prices where taking the price of the previous day the price of the current day is determined. That brought down the lag period from 30 days to just 1 day.

So how does it work?

I am going to talk about how to calculate the petrol and diesel prices on daily basis? If you have an understanding of this, you will always know why you are paying a particular price for your fuel. There are two things you need to constantly track on daily basis to determine the prices. One is Brent Crude prices and second RBI determined US dollar value. Once you know these two values its very easy to determine the prices of petrol and diesel.

How does it happen?

To determine the prices correctly following things need to be taken into consideration.
1. Brent Crude closing prices and the RBI determined US dollar value.
2. Cost calculations for Oil marketing companies. These include Operational costs and transportation and freight costs.
3. Excise duty charged by Central Government
4. Commission charged by the Petrol pump owners
5. State government taxes plus the pollution cess levied.
Once you have an understanding of these you can keep adding them to get the final value.

Determining Petrol Prices

This is done in the following steps:

Step 1:

Take the previous day’s Brent crude price and the previous day’s RBI determined US dollar value. Suppose lets do it for today ie 20th June 2017 Petrol price. The 19th June closing value of Brent Crude was 46.91 dollars. The RBI determined US dollar was 64.3788 rupees. Now multiply 46.91 with 64.3788 to get the value of 1 barrel crude oil in Indian rupees. The answer is 3,020.00 rupees. One barrel is equal to 159 litres. So the value of Raw crude oil per litre is 3,020.00 divided by 159 which is 18.99 rupees. So the actual crude oil per litre costs us just 18.99 rupees.

Step 2:

Now we need to add the expenses that Oil marketing companies like IOC, HPCL, BPCL incur. Operational costs including the refinery costs works out to be 5.65 rupees. This will remain constant at least for 6 months. So if we add this the total goes to 24.64 rupees. For this the transportation cost of 2.68 needs to be added. As the transportation costs are revised every year it remains constant for a year. Now the total is 27.32. So after the 2nd step the Petrol price is 27 rupees 32 paise.

Step 3:

This is the excise duty charged by Central Govt. This is also determined annually and for this year for Petrol it is 21.48 rupees. That is almost 80% of the cost upto step 2. So understand that Govt. charges 80% tax on refined petrol. That takes the price to 48.80 rupees.

Step 4:

It is the commission charged by the Petrol pump owners. It differs from state to state and in Telangana the petrol pump owners charge 7% commission on the price. So 7% of 48.80 rupees is 3.42 rupees which when added to the price of 48.80 takes the total to 52.22 rupees.

Step 5:

This is the last step where state govt taxes and pollution cess are added. Telangana govt. charges 31% tax on petrol and 25 paise is the cess on Pollution. So 31% of 52.22 rupees is 16.18 rupees which when added takes the total to 68.40 rupees. Adding 25 paise pollution cess the final Petrol price is 68.65 rupees.
So the Petrol Price in Hyderabad City on 20th June is 68.65 rupees which is applicable till 6am on 21st June. At 6am they calculate the price again by taking the closing price of Brent Crude on 20th and RBI determined Dollar value on 20th. That’s how the petrol prices are determined.

Determining Diesel Prices

Step 1 and Step 2 for determining the diesel prices is same as Petrol. So the price of Diesel remains the same as petrol at 27.32 rupees.

Step 3:

The excise duty charged by Central Govt for Diesel is 17.33 rupees which works to around 65% of the price of the Diesel. Adding this the price of Diesel goes to 44.65 rupees.

Step 4:

If we add 7% commission charged by Telangana fuel stations to 44.65 rupees it works to 3.12 rupees that takes the total to 47.77 rupees.

Step 5:

This includes the state govt tax and pollution cess. Pollution cess remains at 25 paise but tax on Diesel levied by Telangana govt is 22.25% and that works out to 10.63 rupees. Add that to 47.77 rupees total goes to 58.40 and adding 25 paise cess the price of diesel is 58.65 rupees. So, this is the price of Diesel on 20th June. The value is re determined in the same way like petrol on daily basis.
From the above information it is clearly evident that actual cost of petrol is just 27.32 paise but we purchase it at 68.85 which turns out to be 41 rupees and this 41 rupees is the Tax. Same way Diesel costs 27.32 paise where as we purchase at 58.65 which means a tax of 31 rupees.
NOTE that Petrol and Diesel are not under GST and so the implementation of GST from July 1st will have no impact on the calculation