The math goes all wrong for fuel retailers despite sustained oil price hike

Demand destruction led by Covid-19 and the EV push, cutback in retail prices could end up making the business of running fuel stations unviable

This week dealers of petrol and diesel went on a day’s strike in Gurugram, bringing home to New Delhi their concerns. It might seem crazy that even as oil prices touch dizzy heights, the margins of retail sellers should take a hit. Yet it has happened. It is also part of a larger trend in the year 2022, when it is not certain that shooting commodity prices will necessarily mean more profits for all categories of sellers. The choice of Haryana to stage the token strike was significant, as data shows it accounts for 12 per cent of the country's diesel sales and is ranked just after Uttar Pradesh (14 per cent) and Maharashtra (13 per cent). 

Obviously these businesses have to remain profitable, which the dealers feel is not likely to happen for a long time to come. For oil dealers, the equation is simple. For each litre of petrol and diesel sold, they get a commission. The commission of petrol pump dealerships varies from agency to agency and by location. However, the commission generally ranges from Rs 2.5-5.0 per litre, across states. 

The oil marketing companies need these dealers, and there are 81,009 of them spread across the country. The government also had plans to almost double their number before the Covid pandemic, but a Crisil report had warned against the expansion. Against the projected government number, the report had noted there was room to keep profitable only 30 per cent of the new pumps--about 30,000 of them. “To meet break-even throughput over the next 12 years…pump throughput (should) remain at current levels of 160 kilolitres per month, which will keep the dealer's returns stable at 12-15 per cent.” 

A more recent report commissioned by the oil ministry’s Petroleum Planning and Analysis Cell shows an even more sober assessment. Mapping the sales of diesel and to some extent of petrol in 3,000 top sellers in the country, the report notes demand destruction in both transport and non-transport sectors. “Diesel demand from the non-transport segment is expected to reduce with increasing penetration of renewable energy, reducing demand for all categories of gensets and diesel power generators from mobile towers’ and similarly “In two- and three-wheeler segments, newer technologies will drive faster adoption of electric vehicles. A faster pace of CNG penetration in the three-wheeler and hatchback car segment may reduce petrol demand in future”. 

While the rise in SUVs in place of cars in the private car space had meant larger tanks and therefore demand for oil, in the early half of the twenties, that trend has weakened. “The preference for diesel passenger vehicles in the domestic market (has) reduced significantly over the past decade”. In fiscal 2021, the share of diesel passenger vehicles stood at a third of their share of passenger vehicles sold in fiscal 2013. 

As the table shows the saving grace, going ahead, is the demand for diesel by trucks and other heavy commercial vehicles, which account for more than half of the demand. The average fill size for a truck in India is 111 litre. However, zone wise, the fill size varies. Average fill size in the north zone (Chandigarh, Delhi, Haryana, Punjab, Rajasthan, Uttar Pradesh, and Uttarakhand) is the highest, at 130 litres, and the east zone (Assam, Bihar, Jharkhand, Odisha, and West Bengal), the lowest, at 86 litres.

Overall, post Covid, demand has not returned fully in the urban areas. Petrol car transactions in emerging districts in tier-2 and 3 cities picked up faster than in metros. Rural India, too, saw a similar recovery in fill size, the same PPAC report says. 

To this mix are recent problems. While diesel is more attractive to sell for the dealers—it accounts for 68 per cent of what a pump sells—the recent cutback in retail prices mean the dealers are earning less from their sales. Their percentage take is the same, but the aggregate top line has come down. And since demand is not picking up, for the reasons explained above, the deal for the dealers is not very bright. This is why the dealers went on a token strike. 

In addition, the private sector oil marketing companies have pulled back those sales. Since domestic retail prices of diesel and petrol are still carrying a lot of subsidy, the companies like RIL-BP and Nyara Energy are not keen to sell more volumes as that would add to their losses. They would rather sell the products abroad. 

At one stage before the pandemic, along with the plans for expansion of retail sales outlets by these two—they planned to add 6000 each till 2024, Total and Adani had also planned to join the sector. The reluctance of the existing dealers and the gradual demand destruction in the sector could put paid to those plans. 

Table: End-use share of diesel (retail and direct) across India

Transport sector

Commercial cars 2.9

Private cars

12.4 Three-wheelers 1.2 Trucks/HCV 55.4 Buses 5.9 Aviation/shipping 0.8 Railways 2.1 SUB TOTAL  80.7

Non-transport sector

Agriculture 4.8 Power generation 1.6 Industry 6.3 Mobile towers 0.3 Others 6.3 SUB TOTAL 19.3

Figure in %age, for the full year ended December 2021; Source: PPAC

Buses 5.9