1. Diesel Pricing in IndiaLet as assume that crude oil is being imported by IOC (Indian Oil Corporation)from a company in Saudi Arabia. The price at which this crude oil is purchasedis called FOB Price i.e. Free On Board Price. In simple words this is the priceat which Saudi Arabia Company will bring the crude oil from its Well and deliverit at a nearby international port.Now this crude oil will be transported on ships from aforementioned port to someIndian Port. For this a charge will be paid to transporter. This charge iscalled Ocean Freight. When Ocean Freight is added to FOB Price we get resultantas C & F Price i.e. Cost & Freight Price. ThusC & F Price = FOB Price + Ocean FreightNow the crude oil has reached an Indian Port. Here a term called Import Chargescomes into picture. It consists of three charges -Insurance charges i.e. Premium paid to an insurance company for the insurancecover it provided to the crudePort Dues i.e. Fees paid in lieu of using the facilities of a portOcean Losses i.e. to compensate for the oil lost during transportationOn the imported crude oil, the Govt of India imposes a tax called Custom Duty.It is 2.5 % of the C & F Price i.e. if IOC purchases crude oil whose C & FPrice is Rs. 100 per Litre then Custom Duty will be Rs 2.5 per Litre.When we add C & F Price , Import Charges and Custom Duty we get a very importantterm called IPP i.e. Import Parity Price. In very simple words IPP is the priceof crude oil paid by IOC at an Indian Port. HenceIPP = C & F Price + Import Charges + Custom DutyOne more term becomes worth mentioning here which is EPP i.e. Export ParityPrice. It basically is an hypothetical term. It is equal to the FOB pricerealised by IOC if it WOULD HAVE exported its Diesel to international market.In India the weighted average of IPP and EPP is used. Thus we get anotherpopular term called TPP i.e. Trade Parity Price. It is calculated as follows-TPP = 0.8 X IPP + 0.2 X EPPNow the imported crude oil moves towards Refinery and processed intoPetrol/Diesel/kerosene etc. Here a term called RTP i.e. Refinery Transfer Pricecomes into scene. It is the price paid by OMC (Oil Marketing Company) toRefinery for the purchase of Diesel and in case of diesel it is equal to TPP. Inother wordsRTP = TPPThis refined Diesel is transported by Rail / Road to different retail outlets.For this Inland Freight is paid. OMC spends a lot of money on marketing itsproduct. When we add them we get TDP i.e. Total Desired Price. In other wordsTDP = RTP + Inland Freight + Marketing CostBut OMC sells aforementioned Diesel to retail outlet at a price which is lessthan TDP. This price is called Depot Price.Now the Diesel has reached retail outlet. Here Central Govt imposes Excise Duty,State Govt imposes Value Added Tax (VAT) and Retail Outlet / Petrol pump add itsmargin/profit.To answer your question about different prices in different cities, the statecollects different taxes and the margin and transportation costs also change.Hence finally we get the retail price of Diesel.Lets now understand above definitions in with some data - It is some old datathat I found on the internet, so don't mind me. It is just for illustration.FOB Price - $ 124 / BarrelOcean Freight - $ 2 / Barrel

2. C & F Price (1 + 2) - $ 126 / Barrel = Rs. 48 / Litre(1 Barrel = 159 Litres and $1 = Rs 62)Import Charges - Rs. 0.5 / LtCustom duty - Rs. 1.5 / LtIPP (3 + 4 + 5) - Rs. 50 / LtEPP - Rs. 48 / LtTPP - Rs. 49 / LtRTP - Rs. 49 / LtInland Freight + Marketing Cost of OMC - Rs. 3 / LtTotal Desired Price (8 + 10) - Rs. 52 / LtSubside by Govt - Rs.10/LtDepot Price - Rs. 42 / LtExcise Duty + VAT + Dealer Commission - Rs. 10 / LtRetail Price (13 + 14) - Rs. 52 / LtLets find out the answers of some Basic Questions-What is Under Recovery?Under Recovery is the difference between Total Desired Price & Depot price.Mathematically Under Recovery = TDP Depot priceAre Under Recovery and Loss are similar terms?OMCs are selling Diesel at Rs.10 /Lt Loss. But they are getting the same amountfrom Govt as Subsidy. So OMCs are not incurring any loss. The Govt too istaking almost Rs.10 /Lt as tax on Diesel so they too are not incurring any loss.Hence Under- Recovery and Loss are not the same terms.What is presently used in India EPP /IPP /TPP?Presently for the pricing of diesel TPP is used.Why Finance Ministry is insisting on using EPP?From the above table it is crystal clear that if EPP is used instead of TPP thenTDP will become 51 instead of 52. Hence Under-Recovery will become Rs.1/ Ltlesser. So Govt will have to give lesser subsidy to OMCs. But Govt willcontinue to get same amount as Taxes. Therefore Govt Deficit will come down.Why OMCs and Petroleum Ministry are insisting on using TPP?It is clear from the above answer that if EPP is used instead of TPP than OMCswill get lesser subsidy from Govt. But their expenditure will remain exactlysame as earlier. Hence their financial health will deteriorate.