New Delhi: The Indian basket of crudes shed more than $5 a barrel
last week but has since been stuck at $98.49 for the last three trading
days. Here is a look at the baskets for pricing crude in India and
China, and how significant these are to the retail prices of petroleum
products in either country.
What is crude oil like?
It can be light or heavy, and sweet or sour. Light crudes yield more gasoline, naphtha and kerosene while heavy ones give more diesel, fuel oil and residue. Refineries the world over process a mix based on regional demand.
Any crude with more than with 2.5 per cent sulphur is classified as sour, which has actually to do with taste. It started when kerosene from Pennsylvania crude was displacing whale oil for indoor lighting. On burning, it gave out an acrid smell. To decide if the kerosene could be shipped to the New York and Philadelphia markets, a taster was hired to classify the kerosene. That started the sweet/sour distinction.
What kind of crude do Indian refineries process?
They are compelled to use a mix of sweet and sour. Though indigenous crudes from Assam and Mumbai High are sweet, they accounts for only 17 per cent of the total processed. India has to import the rest, largely from the Middle East and Africa where crude oils are cheaper and involve smaller tanker voyage than from, say, the US. Indian imports comprise nearly 80 per cent of sour crudes of which 82 per cent are from the Middle East. Of the 20 per cent imports that are sweet, Africa sends 99 per cent.
How is crude priced?
The Indian Basket of Crude oil is based on the weighted average of Middle East sour grades (the markers being Dubai and Oman crudes) and the North Sea Brent sweet grade of London. The ratio of actual sour and sweet consumption (domestic and imports) by all Indian refiners in the previous year is used as weights in calculating the current price of the Indian basket. The current weights are sour 65.2 per cent, sweet 34.8 per cent (see box).
Are retail prices based on this?
This calculation is only indicative and is not used even to work out the ex-refinery prices. Unlike in China, it has no bearing on product prices in India, which are fixed at the refinery gate depending on each product’s average monthly or fortnightly price in the international market and on government pricing rules for various products.
How are retail prices fixed?
Diesel and petrol prices are linked to international gas oil and gasoline prices respectively but with a rider: the ex-refinery price is to be calculated on a trade parity basis. The weights given are 80 per cent to import parity (including customs duty, freight, insurance) and 20 per cent to export parity (Singapore free-on-board basis). This was introduced as an incentive to private refiners who helped the country gain self-sufficiency in refining and stop petrol and diesel imports from Singapore.
The other two controlled products, LPG and kerosene, do not attract customs duty and are priced solely on export parity, which is calculated on the first of each month. The rest are freely-priced products.
How far does China’s crude pricing reflect in retail?
China uses a crude basket comprising Dubai, Brent and Indonesia’s Cinta grades and has used this indicator since late 2005 for arriving at products’ retail prices. Under this model, formally rolled out in December 2008, China’s National Development and Reform Commission takes into account costs of procurement, refinery operations, insurance and freight costs, in addition to refiners’ margins. To this basic ex-refinery cost is added a consumption tax and a value-added tax.
Theoretically, China could revise domestic fuel prices when the moving average of the Dubai, Brent and Cinta pricing basket changes by more than 4 per cent over a minimum 22 working days. However, NDRC has the option not to adjust prices even when the 4-per-cent mark is breached on grounds of social, economic and political factors.
What is the maths involved?
Secrecy shrouds the pricing system as NDRC has never disclosed daily calculations or given the specific types of crude oils its uses, or their weightage, since introducing the pricing formula in 2008. This fans a lot of speculation and NDRC’s refusal to raise petrol and diesel prices has put its refiners PetroChina Co and China Petroleum & Chemical Corp with major losses. China has indicated that it plans to change the types of crude oil in the pricing system, shorten the review period and narrow the trigger range under a revised scheme.
What is crude oil like?
It can be light or heavy, and sweet or sour. Light crudes yield more gasoline, naphtha and kerosene while heavy ones give more diesel, fuel oil and residue. Refineries the world over process a mix based on regional demand.
Any crude with more than with 2.5 per cent sulphur is classified as sour, which has actually to do with taste. It started when kerosene from Pennsylvania crude was displacing whale oil for indoor lighting. On burning, it gave out an acrid smell. To decide if the kerosene could be shipped to the New York and Philadelphia markets, a taster was hired to classify the kerosene. That started the sweet/sour distinction.
What kind of crude do Indian refineries process?
They are compelled to use a mix of sweet and sour. Though indigenous crudes from Assam and Mumbai High are sweet, they accounts for only 17 per cent of the total processed. India has to import the rest, largely from the Middle East and Africa where crude oils are cheaper and involve smaller tanker voyage than from, say, the US. Indian imports comprise nearly 80 per cent of sour crudes of which 82 per cent are from the Middle East. Of the 20 per cent imports that are sweet, Africa sends 99 per cent.
How is crude priced?
The Indian Basket of Crude oil is based on the weighted average of Middle East sour grades (the markers being Dubai and Oman crudes) and the North Sea Brent sweet grade of London. The ratio of actual sour and sweet consumption (domestic and imports) by all Indian refiners in the previous year is used as weights in calculating the current price of the Indian basket. The current weights are sour 65.2 per cent, sweet 34.8 per cent (see box).
Are retail prices based on this?
This calculation is only indicative and is not used even to work out the ex-refinery prices. Unlike in China, it has no bearing on product prices in India, which are fixed at the refinery gate depending on each product’s average monthly or fortnightly price in the international market and on government pricing rules for various products.
How are retail prices fixed?
Diesel and petrol prices are linked to international gas oil and gasoline prices respectively but with a rider: the ex-refinery price is to be calculated on a trade parity basis. The weights given are 80 per cent to import parity (including customs duty, freight, insurance) and 20 per cent to export parity (Singapore free-on-board basis). This was introduced as an incentive to private refiners who helped the country gain self-sufficiency in refining and stop petrol and diesel imports from Singapore.
The other two controlled products, LPG and kerosene, do not attract customs duty and are priced solely on export parity, which is calculated on the first of each month. The rest are freely-priced products.
How far does China’s crude pricing reflect in retail?
China uses a crude basket comprising Dubai, Brent and Indonesia’s Cinta grades and has used this indicator since late 2005 for arriving at products’ retail prices. Under this model, formally rolled out in December 2008, China’s National Development and Reform Commission takes into account costs of procurement, refinery operations, insurance and freight costs, in addition to refiners’ margins. To this basic ex-refinery cost is added a consumption tax and a value-added tax.
Theoretically, China could revise domestic fuel prices when the moving average of the Dubai, Brent and Cinta pricing basket changes by more than 4 per cent over a minimum 22 working days. However, NDRC has the option not to adjust prices even when the 4-per-cent mark is breached on grounds of social, economic and political factors.
What is the maths involved?
Secrecy shrouds the pricing system as NDRC has never disclosed daily calculations or given the specific types of crude oils its uses, or their weightage, since introducing the pricing formula in 2008. This fans a lot of speculation and NDRC’s refusal to raise petrol and diesel prices has put its refiners PetroChina Co and China Petroleum & Chemical Corp with major losses. China has indicated that it plans to change the types of crude oil in the pricing system, shorten the review period and narrow the trigger range under a revised scheme.
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