Govt mulling proposal to develop free market for domestic crude oil

• Oil producers have argued that the current practice of allocation gives refiners an upper hand during price negotiation as supplies are guaranteed

• If the proposal is approved, it will enable producers to get better prices and end the current supply logistics problems

New Delhi: The Centre is considering a proposal to abandon the current practice of allocating domestic crude oil to various oil refineries, which would help develop a free market for crude oil produced within the country. According to a report published by The Economic Times, sources in the know of the matter said that the Cabinet is likely to consider a proposal soon for freeing up the sale of crude oil. If the proposal is approved, it will enable producers to get better prices and end the current supply logistics problems, said sources.

The proposal has been picked up by the Centre after years of lobbying by producers, primarily from the private sector, who have viewed the government's practice of allocation as an unnecessary control over the crude oil market.

How does the current system work?

Under the current system, the Centre allocates all domestically produced crude oil at the start of the year to refineries on the basis of their location, processing capability, and transport logistics. And all refineries, whether private or public, have to stick to these allocated quantities. They are, however, free to decide the oil price formula, which is related to international benchmarks and revised annually.

If the crude oil market is freed up, what will change?

Oil producers have argued that the current practice gives refiners an upper hand during price negotiation as supplies are guaranteed. There have been times when price negotiations have carried on for months as producers have felt that refiners have not offered them fair prices. Since oil producers are barred from exporting crude oil, the chance of fair price discovery are further restricted. 

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India currently imports nearly 85 percent of its crude oil requirement. Domestic crude accounts for only 15 percent of the total consumption. Indian oil refiners are mostly dependent on crude oil from international market where prices are volatile.

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