Petroleum Products: Why is the Nepal Oil Corporation constantly raising prices?

There are complaints from the general public that even if the price is reduced once in a fortnightly adjustment, it is increased at other times.

The central office of the Nepal Oil Corporation had fixed the price of petrol at Rs 96 per liter on March 3 last year. At that time, the price of both diesel and kerosene was Rs 85 per liter.

The price of a liter of petrol in Kathmandu has now reached Rs 125 after the last price hike on Saturday. Similarly, the price of diesel and kerosene has been fixed at Rs 108 per liter.

Nepal Oil Corporation, the only body trading in petroleum, has said that the price of crude oil has risen in the international market and the price fixed in India has risen accordingly.

An economist says that even if the rise in the price of petroleum products, which has a direct and indirect impact on the economy, is not considered good, trading at a much cheaper price than in the Indian market will lead to unbearable losses.

How is the price determined?

Nepal buys petroleum products that can be consumed directly from the Indian Oil Corporation.

About 85 percent of the crude oil consumed in the Indian market is imported from the Gulf as well as some other countries.

India sends price lists to Nepal on the basis of price fluctuations in the international market. And based on that list, the corporation sets the price for the Nepali market.

What is the reason for the continuous rise in prices?

At the start of the coronavirus epidemic, the price of crude oil in the international market had dropped to an average of 19 to 20 per barrel.

Demand for oil has fallen sharply as global warming has forced people to stay indoors.

At that time, the corporation also reduced the price by Rs 10 per liter, says spokesperson Bineet Mani Upadhyaya.

But as the oil market gradually returns to normal, prices continue to rise, reaching 72 USD a barrel in recent days, he said.

“Since we have to buy and bring it, we have been increasing it on the basis of the price list we get. Lately, the price of oil has been increasing at around Rs 2 per month,” said Upadhyay.

Economist Keshav Acharya says that petroleum products are viewed as “critical imports” and fluctuations in their prices affect everything.

“It affects everything from medicines to clothing, even salt. The indirect effects are far greater than the direct effects on consumers,” he said.

He says it will not only increase prices but also increase costs.

What is the tax on petroleum products?

Officials of the corporation admit that the tax rate on petroleum products in Nepal is high.

The last time the corporation bought a liter of petrol at Rs 62.41, it added Rs 56.36.

According to Upadhyay, the administrative expenses of the corporation will be only 68 paisa.

In addition, revenue, customs, value added tax, road maintenance tax, infrastructure development tax and environment tax are included.

Upadhyay says that the tax on diesel will be less. Diesel purchased at Rs 63.25 is taxed at Rs 39.3.

Similarly, kerosene purchased at Rs 60.3 paise is taxed at Rs 19.50 paise. Since taxes including value added will not be levied, it will come down.

The government had increased the tax range with effect from last fiscal year. He said that they should not comment on the tax as the corporation has to follow the instructions of the government.

Consumption of petroleum products in Nepal is estimated to increase by about 10 percent annually. But because of Covid-19, consumption is now the same as last year.

According to the corporation, even after the last price adjustment, its loss was Rs 5.32 per liter on petrol, Rs 3.17 per liter on diesel and Rs 258.46 per cylinder on LPG.

“In other words, our sales have dropped by 50 per cent during Kovid. Even at such a time, we have a loss of around Rs 600 million in 15 days,” he said.

What is the impact of the Indian market?

There is a long open border between Nepal and India.

According to the corporation, petrol has recently become cheaper by around Rs 35 in Nepal and diesel by Rs 41.

Officials say freight and other small vehicles are common in the border areas as prices are cheaper in Nepal.

He said that they have been “discouraging the sale of Laiko oil” for the Nepali market so that others do not use it and the concerned agencies have been asked to find out the needs of the buyers when selling the oil.

Why not keep the price lower than in India?

Acharya says that it is not possible to keep a different price in Nepal than in India due to the open border.

“Whether the state subsidizes petroleum or reduces our value to India by reducing revenue, we can’t stop it now. If we couldn’t stop people during Kovid, how many trucks, buses and people coming from there would be full,” he said.

“So the big problem for us is that we can’t afford to go far beyond India’s border price.”

He pointed out that the Narendra Modi-led government in India has not reduced taxes to increase revenue even when the price of crude oil is-30-35 per barrel and its offspring is in Nepal.

“We can’t afford it,” he said. “Fuel may be cheaper in Nepal than in India.”He said about the possibility.

Acharya thinks that it would be very difficult for Nepal’s mechanism to do so even if the price can be made cheaper in certain categories by making Aadhaar card like in India.

Is there a ‘dual character’ in price adjustment?

The general public, who have been hit hard by the price hike, have complained that the government has repeatedly increased the price, but once or twice it has reduced it.

Complaints have increased in the last 15 months as the trend has continued.

But the corporation says that is not the case.

The price of petrol had reached Rs 140 on March 12, 2070 BS. According to Upadhyaya, the price of crude oil skyrocketed at that time.

However, it continued to decline for a period of two years and the price of petrol had reached Rs.

“It is also influenced by the international market. When the rupee depreciates against the dollar, it affects prices,” he added.

What has storage capacity got to do with price?

Although some have said that the corporation has not been effective in adjusting prices in the market due to low storage capacity of petroleum products in Nepal, Upadhyay disagrees.

Those who make such arguments say that when the price in India is cheaper, they can buy and store more and when the price is higher, they can reduce the import and send the stock they have to the market.

But according to Upadhyaya, price and storage capacity are different issues.

The corporation currently has the capacity to store 70,000 kiloliters of petroleum products.

The corporation is constructing two storage tanks of 5,000 kiloliters in Pokhara after the government instructed it to do its homework to increase the storage capacity to three months.

Similarly, the petroleum pipeline from Amalekhgunj to Lothar will be expanded and a storage capacity of 1,03,000 kiloliters will be built and a technical report has been submitted, he said.

In Amalekhgunj, the process of constructing two tanks of 4,000 kiloliters has already started.

“It could happen if we buy it cheaply and keep it for a long time. But what is a long time? The quality of oil itself can go down,” he said.

“The higher the storage capacity, the cheaper the price. India has its own refinery and there are many oil companies. But the current price of petrol in India is around NRs 160 per liter.”

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