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The mystery of the oil pool - Views on News from Equitymaster
 
 
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  • Mar 30, 2000

    The mystery of the oil pool

    For the past six months, there have been screaming headlines of an imminent hike in the oil prices. The oil pool account (OPA) we are told, is expected to have a deficit of Rs 300 bn in the current year and the government needs to raise oil prices once again. Worse, we have been warned that oil prices in the international markets have more than doubled from a level of $ 12.75 per barrel in March 1999 to a level of $ 28.5 per barrel currently – a rise of 123% over the past twelve months.

    The facts, though, are startlingly different from the myth of an oil pool deficit that has been created over the years. A barrel of oil in the international market costs about $ 29. The typical costs of refining, distribution and financing the movement of oil from its crude stage to the end product stage is probably another $ 4 a barrel. This means that a consumer in India who buys every single kind of product that comes out of a refined barrel of oil should pay $ 33 for every barrel of end product.

    However, what the Indian customer is actually paying is US$ 54, a premium of nearly 63% to what he should be actually paying. One barrel of oil generates 180 litres of end products like petrol (37 litres for every barrel of crude oil), diesel (49 litres), kerosene (35 litres) and residual products like tar and aviation turbine fuel (59 litres of total residual products). If one takes all these products and works out a revenue stream based on what consumers pay it would work out to $ 54 a barrel

    So why is the oil pool account showing a deficit? It’s because the import duties, excise duties and the sales tax that the government charges do not form part of the OPA but go directly into the government’s budget. If one takes into account the profits that the government has been making on the imports of 500 m barrels, which the country imports annually, it works out to a whopping $ 10.5 bn (Rs 462 bn).

    Do oil prices need to be actually raised? Or should the oil pool account be renamed as the oil fool account!

    March 30, 2000

     

     

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