Oil Prices in India

This post is of less relevance now that oil prices have been deregulated. Anyway, you can get the perspective if they are brought under control next time when international prices become volatile. P.S--I'll update Tables & Graphs after I have more concrete statistics.

There has been a lot of discussion about the falling (now stable) oil prices and their impact on the Indian Economy. While there is a lot of relief that this has brought to the Indian Economy, especially by freeing some of the government expenses, there are some negatives like dropping revenue from export of petroleum products. Moreover, the security of jobs of Indians working in Middle East countries is also at risk if the decreasing revenues of oil producers leads to reduction in workforce. There are a lot of sources from where one can read more about the possible scenarios, some of which I've mentioned at the end.

This blog post is intended to elucidate the build-up of oil prices in India. There is a common misunderstanding that since the prices of crude oil have fallen by more than half in the previous 1 year (starting June 2014), there must have be a proportionate decline in the prices of final products like Petrol and Diesel. However, this is not true and also cannot be true. To understand this, let us deconstruct the price of common petroleum products - Diesel & Petrol.

1st it should be noted that market price of Petrol is decontrolled since 2010. Therefore, the Oil Marketing Companies are theoretically free to charge any price they wish from the consumers. However, the price which they charge consumers is not arbitrary and there is a precise methodology to arrive at the retail price of petrol and other final products. In any case, even when they were controlled, i.e. OMCs were required to sell at the government determined prices, they were collecting the government subsidy. The subsidy received or the under-recovery made by the OMCs is/ was the difference between desired price and actual price. So let us look at how are the prices determined and what all makes up for the price of petrol.

The hydrocarbon production-supply chain is basically made of 3 parts:

1. Extraction of crude oil from well.
2. Refining and 'breaking' of crude oil into various products such as LPG, Petrol, Diesel, Waxes, etc.
3. Retailing of refined products to the end user.

At each of these stages, the subsequent user pays a cost based on different factors making the 'price-discovery' at each stage a dissimilar process.

As in any market, it is not merely the demand-supply equation that determines the prices. As such, Crude Oil prices also depend on factors like expectation of future demand, competition from other sources of energy, geopolitical stability in supplier regions, speculators in international commodity markets, whims & fancies of oil cartels, etc. As such they are vulnerable and volatile (as is evident from their fluctuations recently). Different international supplier markets have different prices that are quoted daily. Publications like Platts and Argus media are examples of agencies providing information about crude oil prices prevailing at various 'spots'.

Indian refinery sector has shown remarkable improvement because of reforms in the pricing of petro products, and as such our refineries meet the total domestic requirement, even exporting finished petroleum products. Even though only about 7% of total output is exported, it forms the largest component of India's exports in value terms. Refineries purchase crude oil from the producers at FOB (Free-on-board) prices and incur the freight, insurance and other costs (like port charges). The total landed cost for refineries also include the customs duties which they pay (currently customs duty on crude oil is nil + Rs.50 NCCD). Now comes the most contentious, but little understood step in oil pricing.

Crude oil produces different products on 'cracking'. These are differentiated based on their density and evaporation point. Since Crude oil is not uniform in composition every time, there is a variance in the ratios of final products obtained. The following chart is just an example of how much proportion of what is obtained. Please note that it can vary significantly well-to-well from where the oil was sourced.

Depending on the market value, some of the products sell at a higher price than crude oil and some at lower. The Petroleum Planning and Analysis Cell (PPAC) estimates the following average price of all the products sold. It can be seen that on an average, crude oil which costs 100 units, sells for 104 units post refinement. The Refinery Gate Prices (RGP) of products are what the marketing companies pay to the refineries.

The downstream sector (refinement + distribution + marketing) in Indian PSUs is integrated and the OMCs, such as Indian Oil account for more than half of the total refinery output. Joint sector and private refineries such as Reliance also sell to the OMCs at the RGP and export the surplus (that which is more than requirement of the OMC).

To arrive at RGP of a refined product certain guidelines have been laid depending on the product concerned. In case of Petrol and Diesel, RGP is arrived at the basis of Trade Parity Price (TPP). TPP was the 80:20 weighted average of the IPP and EPP (Import Parity Price and Export Parity Price) in case of Diesel before being deregulated. In a market where Import and Export of a product are freely permitted, the domestic price of a product would be set by the domestic demand and supply situation. If supply exceeds demand then the net realisation by the producers in the domestic market would have to be at least  equal to the net realisation through exports. If demand exceeds supply, net realisation by the producers in the domestic market would be capped by the price consumers would have to pay is the product were to be imported. Loosely, one can say that if supply exceeds demand, domestic price would be governed by the EPP (FOB price at India) and if demand exceeds supply, the domestic price would be governed by IPP (CIF price). Although, broadly it can be stated that trade parity price depends on the elasticity of demand and would be weighted average of domestic price and IPP, with weights being determined by proportion of supply being consumed and imported, there are numerous complications in a diverse market like India. It is important to take note of the exact manner in which IPP, EPP and TPP are calculated:

1. IPP - Import Parity Price represents the price which importers would pay in case of actual import of products at the respective Indian port and includes following elements-
1. Free On Board (FOB) price
2. Ocean Freight & Insurance
3. Custom Duties
4. Port Dues, etc

2. EPP - Export Parity Price represents the price which oil companies would realise on export of petroleum products. This includes-
1. Free On Board (FOB) price
2. Advance Licence Benefit (ALB) for duty free import of Crude Oil pursuant to export of refined products. Consequent to abolition of Customs Duty on Crude Oil effective 25.06.2011, the ALB is currently zero.

3. TPP -Weighted average of IPP and EPP based on proportion of consumed and exported.

After Oil is bought from the refineries, it is transported to other parts of the country. Along with freight, other costs like Marketing costs are recovered from the dealers (depot/ wholesaler or retailer). Excise duties are added along with the government specified dealer commission. VAT is added which is the decided by the state government. Local taxes, if any, such as Octroi or Entry Tax, BMC charges, etc. are added and retail selling price of fuel is arrived at. 

Here is the breakup I tried to create in Excel from some free reports available at Platts and Argus website and different sources from Government of India (MoP&G)

Price Build-up of Petrol at, say, Lucknow (FOB Prices are of December 9, 2014 from a free report available at Platts)
Sr. No.	Elements	Unit	Effective 9th Dec'14	Price Acc to Indian Oil as on 1st Feb 2015	Elements4	Description
1	FOB Price at Arab Gulf of Petrol/ Motor Spirit/ Gasoline	$/bbl	70.49		FOB Price	FOB (Free on Borad) daily quotes of Jet/Kerosene at Arab Gulf including premium / discount published by Platts and Argus publications are averaged for previous month.
2	*Add: Ocean Freight from AG to Indian Ports	$/bbl	2.18		Ocean Freight	Ocean freight from Arab Gulf to destination Indian ports as per world scale freight rates adjusted for AFRA.
3	C&F (Cost & Freight) Price	$/bbl	72.67	67.09	159	Rs/$ = 63.26  |  1bbl = 159 ltrs.
4		Rs./Litre	28.91	26.69
5	*Import Charges (Insurance/Ocean Loss/ LC Charge/Port Dues) (Petrol Data is not available, so have substituted Diesel Data)	Rs./Litre	0.45		Import Charges	Import charges comprises of Insurance, Ocean Loss, LC Charges & Port dues applicable on import of product.
6	Customs Duty - - Basic Customs Duty @ 2.5% - Countervailing Duty @ Rs2.70/ltr + Rs.6.00/ltr SAD - Additional Customs Duty @ Rs2.00/ltr	Rs./Litre	11.43		Customs Duty
7	Import Parity Price (Sum of 3 to 5)	Rs./Litre	40.80		Import Parity Price (IPP)	IPP represents the price that importers would pay in case of actual import of Petrol/ Diesel at the respective Indian ports.
8	Export Parity Price (FOB Price at India for Petrol + Advanced License Benefit for duty free import of Crude Oil)	$/bbl	71.48
		Rs./Litre	28.49
9	Trade Parity Price (80%Import Parity Price + 20%Export Parity Price)		38.34
10	Refinery Transfer Price (RTP) on landed cost basis for BS IV Petrol (Price Paid by the Oil Marketing Companies to Refineries)	Rs./Litre	38.34	27.26	Refinery Transfer Price (RTP)	RTP based on Import Parity Price, the price paid by OMCs to refineries.
11	*Add : Inland Freight and Delivery Charges	Rs./Litre	1.00	Sum Should be 33.68-27.26	Inland Freight & Delivery charges	It comprises of average freight from ports to inland locations and delivery charges.
12	*Add : Marketing Cost of OMCs	Rs./Litre	0.69		Marketing Cost	Marketing Cost & Margin are as fixed in the 'PDS Kerosene and LPG (Domestic) Subsidy Scheme, 2002'.
13	*Add : Marketing Margin of OMCs	Rs./Litre	0.71
14	Total Desired Price (Sum of 10 to 13)-[Excluding Excise Duty, VAT and Wholesale & Retailer Commission]	Rs./Litre	40.74
15	Less : Under Recovery to the OMCs [Excluding Excise Duty, VAT and Wholesale & Retailer Commission]	Rs./Litre	0.00		Subsidy by Central Government
17	Price Charged to Dealers (Depot Price) (14-13)- Excluding Excise Duty & VAT	Rs./Litre	40.74	33.68	Excise Duty
18	Add : Excise Duty - @ Rs.15.40/ltr - Basic Excise Duty @ Rs.6.95/ltr. - Additional Excise Duty (Road Cess) @ Rs.6.00/ltr - Special Additional Excise Duty @ Rs.2.00/ltr - Education Cess @ 3%	Rs./Litre	15.40	15.40
19	Add : Wholesale & Retailer Commission and Other charges fixed by State Government Dealer's commission @ Rs.1390/KL +.883% of Product Billable Price	Rs./Litre	1.89	2.03	Wholesale & Retail Dealer Commission and Other charges fixed by State Government	Commission fixed for Wholesale & Retail Dealer and other charges like delivery charges by District authorities / State Government.
20	Add : VAT (including VAT on Wholesale & Retailer Commission) @ 26.80% in UP	Rs./Litre	11.42	9.57	VAT (Sales Tax)	VAT at applicable rate in respective State. It varies from state to state
21	Retail Selling Price at Lucknow (Sum of 17 to 20)	Rs./Litre	69.44	60.68
	*Exchange Rate	Rs./$	63.26

Sources:

Impact of fall in Crude Oil prices -

http://www.businessinsider.in/Here-Are-The-Big-Winners-And-Losers-Of-Low-Oil-Prices/articleshow/44942790.cms

http://marketrealist.com/2014/12/indias-inflation-reacted-fall-crude-prices/

Why Am I sad today?

Today, 'bhai' got bail from the Bombay High Court. After running away from law for 13 years, he was finally served justice 2 days back. Securing a bail in a record-of-sorts 2hours, he has now obtained an extension of bail and a suspension of sentence from the High Court. Next date of hearing is in June. Could have been June 2057 as well, who cares? Anyway, the money for now is secure. I mean the Rs. 30,000 bail money, not the hundred crore Bollywood investment. Who knows how much record will his next classical create.

FYI, it should be clear how the judiciary works. A higher court does not hear the arguments for or against the case. Once a lower court has convicted a person, it cannot be overturned. UNLESS..... Rest assured, the investigation and questioning of witnesses does not take place again. The facts of the case already established do not change. What can change (and will likely change) is the opinion of the judge arrived at. The higher court, oops.. the HONORABLE court looks at the facts from new angles, and can even look at some 'obvious facts' overlooked or missed by the lower court. Now it's their turn to pronounce a judgement. The lawyers have already applied for overturning of conviction in this case. Let's wait for the verdict, out soon in 2063.

Now few things sadden me today.

First is this 'net-non-neutral' judicial system. It violates the principles of neutrality in two ways:-

a. It works at a differential speed depending on monetary and muscle power of the accused.

b. It works at a differential speed depending on stage of trail of the accused.

While lakhs languish in our jails awaiting a trail (2/3 of total 4Lakh inmates according to Government), a convict is let off with a bail bond because of 48 hours of 'good-behavior'. BULL SHIT. Picture this YOUR HONORS - a postman in UP was held innocent 29 years after allegedly pocketing Rs. 57.

Second is the reaction from the society, especially youth.

For once I would sympathize with those people who are not aware of current developments - those guys from random poll videos like TVFs republic day. But it is the youth that is justifying his innocence based on some perceptual humanitarian work he has done which saddens me most. Seriously guys? So you are saying that if I murder someone and open a multi-crore apparel chain with a weird-made-to-sound-philanthropic name and donate some (even entire) amount to charity, I will be free from my sin? Is philanthropy a new form of dip in Ganga? Even the Yo!-so-cool AIB guys used it to justify their roast show. So what if an entire industry, especially the like of his brothers Sohail and Arbaaz are dependent on him for employment? Can't resist this joke here - If 'bhai' was not 'bhai', the ones on that pavement could very well be Sohail and Arbaaz. Anyway, bhai's team is busy tracking who else to provide employment to once this 'drama' is over. Eagerly waiting for Abhijeet's next album by Sohail Khan productions.

As for Bollywood morons, well, they are morons. I am surprised that people actually had some expectations from them.

Third thing that saddens me is the lawyers. If this is what goes in form of professional ethics, then Rajniji save this country from lawyers. Just as we thought Ram Jethmalani was doing something good for black money, some else seems to have taken his place. Harish Salve rejected the post of Attorney General for the government in 2014 so that he could be Attorney General in the parallel government - of Mr. Ambani. That says it all. Sir,  please justify your stand with your humanitarian PIL work.

The now famous politician, Baba Siddique running to his aide and expressing trust in Judicial system was the final nail in the coffin. How so non-ironic.

If ever there was a better time for those 'I don't want to live in this world' memes, it is today.

Indian Monsoon

..this post is under construction...

Monsoon is coming and along with it comes all the baggage of unpredictability and way-off-the-mark forecasts. Why is it that even with so advanced technology and simulation models at our disposal we just can't get the prediction right? How do Americans or Europeans get the forecasts in their country right, while we, with so much progress in 'rocket science' are not able to? In this blog post I'll help to deconstruct Monsoon. The complexity of this still-to-be completely understood phenomenon will answer our questions. 

Monsoon (from Arabic Mausim meaning season) refers to seasonal reversal in direction of winds. It is said that Al-Beruni coined this term while he was on Gujarat coast. To understand this reversal, we must know about the Global Pressure Belt system. 

India (South Asia) lies south of 30^oN latitude. As seen in the figure, this region lies in the zone of North Easterly Trade Winds (winds are named from the direction they flow, rather than to the direction they are going). Since solar insolation at Equator is maximum, there is high temperature and low pressure. Air in this region rises up and air from tropics (30^oN and 30^oS) rushes here. Now, shouldn't the arrows in the diagram then be straight rather than curving, i.e. the wind should come from absolute North or South rather than from North-East or South-West? This is because of an apparent force, Coriolis force. Suffice to say that according to it, things moving in Northern Hemisphere are deflected towards right and in Southern Hemisphere towards left of their direction of motion. This apparent force is nil at the equator and increases as we move towards poles.

These pressure belts are not static, i.e. they largely follow the Sun's apparent movement over earth. This is because of rotational motion of earth on its inclined axis (23.5^o). When the sun is in Northern Hemisphere (i.e. summer season in North), these pressure belts also tend to migrate northwards. Since Sun is now directly above northern tropical latitudes, they receive maximum insolation, and hence are the areas of low pressure. For a very crude understanding, Monsoon can be thought of as winds flow into this low pressure from South. But that leaves the following questions:-

1. Where are these winds originating from?
2. What drives these winds and gives them energy? What is the source of rainfall?
3. Why don't the winds from North come into this low pressure region?
4. When do the winds strike (or technically, Monsoon breaks)?
5. Till how long will these continue to flow over the subcontinent?

The thermal concept is a very old concept that cannot answer these questions. In fact, Monsoon is a much more complex phenomenon than the thermal concept makes it look.
Let's get into details.

In the diagram above, there is ITCZ (Inter Tropical Convergence Zone) at the Equator. It is the zone where trade winds from Northern and Southern Hemisphere converge. Now this zone is characterised with a central westerly air flow, called equatorial westerlies in some parts. With the shift of sun northwards, the ITCZ also migrates northwards. The northern region, N-ITCZ, is now the zone where south-east trade winds after crossing the equator, reach and rise. At this point, it's technically wrong to call it a convergence zone as no convergence occurs here (as there is nothing coming from the North).

The low pressure areas that develop over the sub-continent are not stationary and may change their position suddenly depending on upper air circulations. This proves the fact that these areas are not merely thermally induced. Moreover, high temperatures grip the areas, especially north-western part starting mid-April, reaching maximum in May. However, monsoon does not even reach the southern coast until first week of June. Further, monsoonal rainfall is not wholly orographic (meaning mountain induced, where moist winds are forced to rise over mountain slopes and saturate in process, giving precipitation), rather they are convectional as well as cyclonic.

The questions above have been answered to a large extent by the recent concepts proposed after MONEX (Monsoon Expedition) and subsequently refined with satellite observations. In brief, there are two phenomenon - Jet Streams and Tibetan Plateau heating- which EFFECT the monsoon along with shifting of ITCZ; and there are several phenomenon, like El-nino and Indian Ocean Dipole (IOD) which AFFECT the monsoon.

In summers, Tibetan plateau, a huge granitic barren landmass, 4000m high undergoes immense heating, receiving 2-3^oC more insolation than neighbouring areas. It acts as a barrier as well as a heat source. As a heat source, immense heating leads to rising of air. This warm air collects in upper troposphere and upper air anti-cyclonic conditions (high pressure conditions, imagine massive amount of air collecting at a point) are formed. Anti-cyclones being clockwise in Northern Hemisphere (remember ANC - Anti-Cyclones North Clockwise), the air circulating at the southern end would be from east to west (easterly). A distinct branch of this anti-cyclonic flow lies over India, extending from North-East to South-West. On intensification, this arm extends up to Indian Ocean and intensifies the already existing High Pressure cell, so as to finally move as South-West Monsoon. Thus, in essence, its role is to strengthen the winds crossing the equator so that they reach the Indian shores.

As a barrier, Tibetan plateau's role is related to jet streams.

Farmers of the Country, UNITE!!

Call Jhadoo a Vacuum Cleaner and it starts to act as one - Aam Aadmi Party's Victory

An AAM analysis

With an emphatic and thrilling win in Delhi Elections, the Aam Aadmi Party has emerged as a viable alternative to the Congress and regional parties as a voice of opposition against the ruling pro-business BJP. The victory margin has generated a buzz that the jhadoo should now be replaced by a vacuum cleaner.

As there were so many analysis post 16th May-2014, there are bound to be this time around too, though the reasons for BJP's defeat more or less have already been mentioned by ‘eminent’ experts at the 24 hours news channels.

Apart from stating some very obvious reasons that led to BJP's downfall, such as parachuting the candidates, excessive negative campaign, arrogance, Ghar-wapasi, Sadhvis & Maharajs, and even the Pinstripe suit, the discussions have been rhetorical (& sometimes confusing – Kiran Bedi being brought late in the campaign v/s the pathetic speaker that she is). The twitter-journos have only confirmed their standing on hollow bases, their euphoria for an AAP victory overwhelming their reasoning abilities. I call these factors obvious not because their negative impact has been empirically established, but because they were prominent in the discussion agenda preceding the election - both as an opposition's offence and BJP's defence, and clearly in retrospect it can be argued that the defence was rather appalling.

The acknowledged but unanalysed factor has been that of perception - the perception that BJP has failed in its 9 month rule at the centre and that AAP's 49 day rule was at least satisfactory, if not heavenly; the perception that if BJP comes to power it is going to be indifferent to say the least and AAP would truly be a people's government, sans dharnas this time. Here, let me say that the appealing but unrealisable promises alone do not explain the basis of AAP's victory. In fact, everyone had their own list of such populisms. What turned the wave in favour of AAP was that their leader had managed to get the perceptual upper-hand. The 'obvious' factors continue to be debated in media, so I will focus on the not-so-attention-generating 'perceptual' factor.

1.       As soon as Arvind Kejriwal resigned from his 49 day dharna-cum-governance stint, AAP supporters were spreading the achievements of the government in its 49 day rule. Even though little of note happened during that time, the list looked like achievements of 'Ram-Rajya'. Empathetic behaviour of government officials, distribution of lifeline water, disappearance of police-hafta, etc. were endlessly repeated so as now they have the status of accepted facts. Another initiative of Mohalla Sabhas, which are little more than Resident Welfare Associations, was cited as a radical step in democracy. If the experience of RWAs is any guiding step, this was a redundant gesture, if not futile. But, perception matters and these 'inclusive' steps were billed as ushering in 'Swaraj'.

2.       BJP's perception as an anti-poor party has been amplified by the reactions to the Land acquisition ordinance and the ongoing disinvestment program. While the criticism by some policy experts has been factual and insightful, the discourse has been hijacked by the political parties, who very well realise that not much can be affected until the laws have been passed in the Parliament. On the macroeconomic front, the opposition is shedding croc-tears for tangible outcomes, as if Modi needed to build certain kilometres of highways and erect some industries to earn a certificate from them. Even the never satisfying industry bodies echo such sentiments, ostensibly to extract further concessions. There is a growing current that nothing has happened in the 9 month Modi rule, but nobody steps forward to elaborate on this. On the contrary, the recent ordinances suggest that the government will not be held hostage to the opposition's obstructionist tactics and is committed to pursue its reform agenda. Again, the perception that has been created is that this government is little different from the previous one, with the added baggage of it being favourable to certain industrialists, especially the punching bags of Arvind Kejriwal.

3.       On the front of the promises made, only time will tell whether this positive expectation turns into legitimacy. The current economic reading, although, leaves little doubt about the fictitiousness of these claims. Just like Narendra Modi's victory in Lok Sabha elections created an atmosphere of heightened macroeconomic expectations, Arvind Kejriwal has managed to 'push the envelope further'(sic).

To get the impact of perception, a comparison is necessary. When Modi talked about bringing black money and getting 15L in the accounts of everyone, very few took notice and ignored it as an election gimmick (honestly, I, who has listened to so many of his speeches, did not even know he has made such a ridiculous proposition). When 100 days passed, the Congress made the nation take notice of this promise and generated a nation-wide debate on the issue, in process generating an absolute negativity for the government. Making such a promise was ill-conceived, as it invited a clever reaction from the opposition which capitalised on this blooper. Here, AAP's case is on a better footing as it has already got the 'undoable' certificate from the opposition. (Unintentionally)Well Played!

Similarly, the Jan Dhan Yojana, an excellent scheme with an outstanding objective and even more outstanding implementation has managed to garner much negative publicity. More than the incentives given to attract the customers, the intricacies of the scheme have attracted mocking. As if the people who were already made to expect Rs.15L from the black money suddenly have Rs.5000 more to get in doles from the overdraft facility.

I will end by giving an unrelated example which serves as an anecdote to realise the impact which false perceptions create. The pharmaceutical industrial units in India which cater to the west have some of the best hygiene standards found anywhere in the world. Given the stringent norms laid down by the USFDA and other regulators and also the political-business pressure of major pharma MNCs, Indian pharma firms adhere to the strictest cleanliness practices. But because of the Ranbaxy episode, the dominant narrative that has been established is that there is little regard to hygiene in India. Not only do foreign MNCs now use this argument to their advantage in USFDA hearings, but also the prescriptive economic-journalists have elevated this narrative to the status of a fact, probably without visiting any of the manufacturing facilities. It is a different matter that Indian firms are consistently ‘disappointing’ the regulatory inspectors with their state-of-the-art facilities. And our journalists are blind to such information. Perception and prejudice fuel into each other. (I have visited the premises of an American-German firm in New Jersey. In India, I have confirmed the practices with my relatives and friends who work in Indian firms).

The conclusion is that offence wins - on policy front, not on personal front. On personal front it has only backfired in a growing polity where people crave more for outcomes rather than personal duels. On the policy front it is conclusive that whatever you do, you must communicate it sincerely and proactively, before the opposition gets to you. By you giving the avenues to the opposition to attack, the narrative gets hijacked and the agenda gets derailed. BJP has already a lot to learn from the obvious factors of defeat, it might as well pay attention to its perception in the masses.