PHOTOGRAPH: AMARJEET KUMAR SINGH/SOPA IMAGES/ZUMA PRESS WIRE
LAST WEEK Nepal Oil Corporation (NOC), the state monopoly that imports, stores and distributes petroleum products in the country, cut petrol by Rs20 a litre and diesel by Rs30. For a Kathmandu driver, that brought petrol from Rs217 to Rs197 and diesel from Rs225 to Rs195. The corporation attributed the cuts to reduced purchase prices from its sole supplier, Indian Oil Corporation (IOC), following a retreat in global crude markets after Iran-US peace negotiations eased disruption risks around the Strait of Hormuz, through which about a fifth of the world’s oil supply passes. The announcement was good news. In one narrow sense it was.
In a wider sense, it illustrated the problem accurately. Global Brent crude had by early July fallen over 40% from the war-premium peaks it reached when Middle East tensions briefly pushed it towards an extraordinary $126 a barrel in late April. Yet Nepal’s retail petrol price fell by just 9.2%, and diesel by 13.3%. At Rs197 a litre, Nepali drivers continue to pay a substantial premium over what Indian drivers pay at the pump for the same refined fuel sourced from the same Indian refineries. The crude price fell steeply. The consumer price fell modestly. That has multiple explanations, each of them structural, and none of them going away soon.
The first thing to understand is that Nepal does not import crude oil. It imports finished refined petroleum products (petrol, diesel, kerosene, aviation fuel) from IOC under a bilateral supply arrangement that reflects Nepal’s geography: landlocked, no domestic refining capacit and 900 kilometres from the nearest major port at Haldia.
The price IOC charges is not simply the Brent crude spot price translated through volume. It incorporates IOC’s own refining margin, transportation costs as well as commercial terms between two state corporations. Refining margins do not fall as fast or as far as crude prices when crude declines. A 40% fall in Brent does not produce a 40% fall in the ex-refinery price of finished diesel. Some portion of the global crude fall disappears inside the supply chain before it reaches Nepal’s border.
The second layer is tax. Nepal’s fuel prices carry a fixed Infrastructure Development Tax of Rs10 a litre on petrol and diesel, customs duty, excise duty, and VAT at 13%. These levies are either flat per-litre charges or percentage-based on the consumer price: they do not move when crude falls. When the underlying import cost drops, the government’s tax take stays roughly constant, meaning the proportion of the pump price made up of tax actually rises as crude falls. The government is the silent beneficiary of every global crude decline, collecting the same fixed duties on a smaller import cost base.
The third layer is NOC’s own financial history. The corporation ran cumulative losses and debts that peaked near Rs50bn, confirmed in myRepublica reporting on its accounts, primarily during the periods when geopolitical shocks pushed international crude to extraordinary levels and NOC held domestic prices artificially low for political reasons.
Those losses were real: banks extended credit, the government provided guarantees and NOC’s balance sheet deteriorated. When crude falls and NOC’s margins recover, the corporation does not automatically pass the full saving to consumers. It rebuilds the balance sheet it depleted when absorbing losses on behalf of the government. Nepali consumers paid below true cost during previous crude surges. They are now paying above what a pure cost-plus formula would produce.
Then there is the cross-subsidy. Cooking LPG, which the majority of urban Nepali households use daily, is politically untouchable. Even with global crude plunging, NOC managed to shave just Rs100 off the politically sensitive cooking gas cylinder in its latest turn, leaving it at Rs2,060. Maintaining affordable LPG requires cross-subsidizing its steep losses with margins extracted from petrol and diesel. A full pass-through of crude price falls into petrol and diesel would mean either letting LPG rise to market rates or finding another subsidy source. Neither option is politically simple.
What this adds up to is a fuel pricing system that moves slowly in the consumer’s favour and quickly in their disfavour. The Himalayan Times reported earlier this year that NOC was recording heavy losses again as Middle East tensions pushed crude back up. By July the situation had reversed. But the Nepali driver experienced the full weight of the price surge and only a fraction of the relief—not because the system is corrupt, though NOC has a documented history of corruption in its depot operations—but because the system was designed to protect the corporation’s balance sheet and the government’s revenue before it protects the consumer’s wallet. ■
