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Thursday, December 8, 2011

Smoke and Mirrors

Alex Jr. McQueen, a white American, considers himself a lineaged investigative lawyer. He is the third generation of “McQueen, McQueen & McQueen.” However, at times, he wonders if there would be a fourth-generation McQueen, for, if truth were told, Alex Jr. does not fancy the female of the species. Actually, he fears that he is leaning otherwise.
Presently, the business at his firm is on the upswing thanks to his highly efficient knowledge partner, Sundari Subramanium - an Indian by birth and, particularly, proud of it. Otherwise, she is a complete American. Sundari, also popularly known as Sunshine, is of good height, well groomed, comes to work in smart bespoken western office wear and, above all, is supremely self-assured. Moreover, the sparkling hexagon-shaped diamond studded ring, a family heirloom, she says, that she sports on her finely chiseled nose adds to her stately look. Alex Jr. considers himself lucky to have found her. However, he is unaware that Sundari is as happy to work with him for she believes that he is safe. She does not believe in mixing work with distraction.
It was on November 30, 2011, that McQueen, McQueen & McQueen came into the life of India. A call came from an important TV news anchor of India to their office on the 5th Avenue, New York, asking them to investigate what the anchor called the curious case of petroleum pricing in her country. She gave a brief background of the events in the last few weeks.
The story began on the midnight of November 3, 2011. At that precise moment, the oil marketing companies (OMCs) of India raised, once again, the price of petrol in the country citing the rising prices of imported crude oil and the dropping value of the Indian rupee as the cause of it. The so-called expert analysts unquestioningly bought the argument. Perhaps, sitting in the comfort of air-conditioned TV studios had made them too lazy to do any serious homework.
A couple of days after that, on November 5 to be exact, to lend a sharp edge to the rationale for the increase in the price of petrol, Indian Oil Corporation, the nation’s largest oil firm, came out with its financial performance for the quarter ending September 30, 2011. It reported a net loss of Rs 7,485.55 crore (US$1.5 billion) due to mounting losses on fuel sales.
The scenario turned scarier when the Chairman of Indian Oil Corporation said on November 9, that the borrowings from the banks has almost reached the limits and getting further loans from banks may not be possible after December. At that stage, the corporation may not have money to import crude oil and may have to close down some of its refineries leading to a shortage of petroleum products in the country. Another massive price increase seemed to be in the offing for all petroleum products – petrol, diesel, kerosene, and gas cylinders.
However, in a most dramatic turn around, on November 15, to the disbelief of everyone, the news came that the OMCs had reduced, yes, reduced, the price of petrol by Rupees 2 a litre. It was a theatre of the absurd at its best. And, again on November 30, the price was reduced further by another 78 paise per litre.
It was for this reason that the TV channel had called Alex Jr. McQueen to look into the mystery of the double price reduction considering the heavy losses claimed by the OMCs of India in the past. 
Alex Jr. then called Sundari Subramanium who said that she had overheard the whole story on the extension line and had already started studying the matter. Thanks to the internet, she said she would have the report ready in 30 minutes. She was true to her word.
She began, “Alex, the first thing to be understood is that the petroleum pricing in India is an optical illusion.”
The statement startled Alex Jr. McQueen but recovering quickly he said, “But Sunshine, I was under the impression that India had long given up being known for its rope trick.”
She gave a small smile and continued, “The U.S. Energy Information Administration (EIA) publishes every month, for the benefit of the US consumers, a ‘What We Pay For In A Gallon of Regular Gasoline,’ giving the break-up of cost under four different headings — crude oil, refining, distribution and marketing, and indirect taxes. Indian OMCs could also furnish numbers in the same EIA format. Unfortunately, they will not do it because it would give away their game.”
“Uh, uh that’s interesting.”
After a pause, she continued, “Alex, you would know that the average retail price of petrol in the U.S., for the week ending December 05, 2011, was US$ 3.29 per gallon (an American gallon is equivalent to their 3.79 litres.) Therefore, converted into rupees, even at the rate of Rs.51.75 to a dollar, an American only pays Rs.45 for a litre of petrol at his gas station.”

“And what does an Indian pay?”

“Alex, hold your breath – even after the reduction of Rs.2.78 per litre, he still pays about 50% more per litre.”

Alex Jr. exclaimed, “Oh, my God. You mean to say an Indian pays Rs.68 for his litre of petrol and yet Indian Oil Corporation makes a loss. Gee, that requires some accounting jugglery. Sure, rope trick is still alive in India.”
“Yo, there is still some more to come. If one deducts the indirect taxes of 12% and the gross profit margin of 20% that is charged to an American in the Rs.45 per litre that he pays at the gas station, the total cost of production of petrol would work out to little less than Rs.32.00 a litre in the US. Even granting that the cost of production of petrol is the same in India, a recovery price of Rs.32.00, without taxes, would not entail any loss for the Indian OMCs.”
“Hey Sunshine, since petrol in India is currently being retailed at an average price of Rs.68 a litre, our mission is to trace where the difference of Rs.36.00 per litre is walking off to.”
Sundari Subramanium laughed at the lawyer’s witticism.

Alex Jr. happy at her appreciation, continued, “Seriously speaking, the OMCs can only make a loss if they are recovering less than Rs.32.00 a litre for themselves of the Rs.68 a litre being collected from the retail customer. And, if the OMCs are, indeed, making a loss, then the conclusion is that the various governmental authorities are collecting a hefty amount of indirect taxes - far more than the actual cost of production! And, thereafter, to blame the rising prices of imported crude oil and the dropping value of the Indian rupee is, indeed, smoke and mirrors.” He followed it with a light-hearted guffaw. 

Sundari, tapping her nose ring, a sign that she was in deep thought, finally added, “Alex Jr., there could be a corollary to that. Suppose, if by any chance, the OMCs are recovering more than Rs.32.00 per litre, they should be making a profit. The question then would be how these profits are being turned into losses.”

“Wow that could be a multi- million dollar question!” 

“Sure is. But Alex, there is another interesting story. A former Petroleum Secretary, T.N.R. Rao, speaking on the prices of a LP cooking gas cylinder, said in 2005, “that routine cost-padding and inefficiencies actually hike the per cylinder price by as much as Rs.100!” At that time, the so-called “under recoveries” per cylinder were also put at Rs.100! I suppose the present cost padding must be Rs.246 per cylinder.”

“Hey, how can you say that sitting here?”

“Elementary, dear Alex. The present ‘under recovery,’ hyped by the government is that it is Rs.246 per cylinder.” 

With a loud chuckle, Alex Jr. gave a thumb up sign to Sundari.

Alex, pack your bags, I have some good news. We are leaving for Delhi tonight. I have booked two first class tickets on Jet Airways and the Indian TV channel is putting us up in one of the special suites at the Maurya Sheraton,” and, with a wink, added, “to unravel the rope trick!”

PS: The Math for those inclined.
Reference for USA prices per gallon:

PS 2.  1 US gallon = 3.78541178 liters.

PS 3. Broad Calculation to arrive at the cost of production:

US price at the retail outlet                                    Rs.45.00 per litre

Less 12% indirect Federal and State Taxes        Rs.  5.40 per litre

Less 20% Gross Profit Margin                              Rs.  7.92 per litre

Cost of production at American prices              Rs.31.68 per litre.

Rounded up                                                                Rs.32.00 per litre

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