How Do Petroleum Companies Make Money?

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Over the past year, petrol and diesel prices have remained unchanged, leading to petrol being sold at over Rs 100 per litre in several cities. However, there is some positive news for petroleum companies.

Due to the combination of higher retail prices in the domestic market and lower crude oil prices internationally, petroleum marketing companies are projected to achieve a pre-tax profit of at least Rs 1 lakh crore in the current financial year.

In this article, we will explore how petroleum companies make money and the factors contributing to their profitability.

What’s Happening?

A recent report by Crisil stated that oil marketing companies (OMCs) are expected to achieve an operating profit of Rs 1 lakh crore in the current financial year. To put this into context, during the period from FY 2016-17 to 2021-22, the average operating profit for petroleum companies was around Rs 60,000 crore. However, in the last financial year, 2022-23, this profit had decreased significantly to Rs 33,000 crore.

The analysis is grounded in the operations of three public-owned petroleum companies: Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation (HPCL). According to the report, these companies are currently earning a profit of Rs 8 to Rs 9 on every litre of petrol and diesel sold, contributing to their overall profitability.

Furthermore, the report also highlights that the margin of these companies in the first quarter of the financial year 2024 was favourable, indicating a positive trend in their financial performance.

How Do Petroleum Companies Make Money?

To understand how petroleum companies operate, it is essential to know their working structure. These companies refine naturally occurring crude petroleum products to produce high-quality fuels like petrol, diesel, kerosene, jet fuel, and other petroleum products.

The process involves refining crude oil to purify and transform it into valuable products. Once the refining is done, companies distribute, sell, and market these products across various states and cities.

Petroleum companies generate their revenue from two primary sources. The first is the refining business, where they earn through what is known as gross refining margin. This margin is calculated by subtracting the cost of crude oil from the price of refined products.

The second source of income is the sale of petrol and diesel through petrol pumps. In this aspect, companies earn a margin on the fuel products they sell. This margin contributes to their overall revenue and profitability.

Reason for the Benefit to Petroleum Companies

In the financial year 2022-23, the gross refining margin of petroleum companies averaged $15 per barrel. The primary factor behind this was the robust demand for diesel. Interestingly, despite the international price of crude oil experiencing a significant decrease during this period, petrol and diesel prices in the country have remained unchanged since May 2022.

What’s Next?

In the financial year 2023, the average price of crude oil was $94 per barrel. Despite this, petroleum companies did not experience strong retail prices for their products. Consequently, during this period, these companies incurred a loss of Rs 8 per litre on marketing, despite having favourable refining margins. As a result, the overall profitability of the companies was negatively impacted throughout the financial year.

However, the report highlights a positive development. The price of crude oil has decreased, resulting in improved performance for these companies. After facing an operating loss in the first quarter of 2022-23, they achieved higher operating profits in the subsequent quarters. This trend is expected to continue in the future as well.

*The companies mentioned are for information purposes only. This is not an investment advice.

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