OMC margin revision: a damp squib

Oil marketing companies and dealers have been waiting for the revision in their margins. They have been looking forward to it especially since these margins and commissions are now linked to the CPI since 2014-15. Inflation has been rising, raising their hopes.

The cost of doing business has increased due to increase in inflation and significant depreciation in the currency since the last margin revision. However, against a 9 percent increased demanded by the OMCs and between Rs0.25-0.34 per litre proposed by the Petroleum Division for OMC margins and dealer commission, the ECC has approved a uniform rate of Rs6.58 percent for the rest of FY20.

Not only that; the much delayed revision (which was expected in June 2019) has also not compensated the OMCs for the delay. Recall that in 2017, margin revision took place in November as well and the increase in margins included the delay component that the OMCs now will be bearing on their own. This is likely to be reflected in their profitability going forward. It is reported that the OMCs had also asked for incorporating the exchange losses into the price mechanism, which has also not been entertained by the ECC.

The rationale behind the 6.58 percent uniform rate for the increase in OMC and dealer margin has been the average inflation in the country from April 2018 till May 2019 instead of taking 8.8-9 percent inflation of May 2019 alone. However, stakeholders and players in the sector have raised the concern that the practice goes against the margin revision mechanism based on monthly CPI approved initially. Due to the contractions, it is likely that the entire margin determination process will be reexamined and devised again. The ultimate goal of the government is to deregulate the prices of petrol and diesel where the market forces would increase competition and encourage the oil companies to invest in additional storage capacities.