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State-owned oil marketing companies’ finances crippled: Fuel price hike inevitable

	May 26, 2008

Global crude oil prices touched an all time high of over $135 per barrel, raising concerns in India about rising inflationary expectations, widening trade deficit through a higher oil import bill, a mounting subsidy bill and rapidly depreciating domestic currency.

The price of Indian basket of crude oil — the price at which Indian refiners buy crude oil — peaked a record $125 per barrel amid concerns that it could rise further.



India, which imports about 70 per cent of its total crude requirement, faces the twin challenges of containing the import bill and maintaining retail fuel prices at reasonable levels.



Oil imports during April- March 2007-08 were valued at $77.03 billion, over 35 per cent higher than last year’s $56.94 billion. Non-oil imports in 2007-08 grew by 23.4 per cent to $158.9 billion.



Government-owned oil companies are losing about Rs 580 crore per day. In February, the government had raised the prices of petrol by Rs 2 and that of diesel by Re 1 a litre as part of its efforts to mitigate the spurt in global oil prices.



A hike in petrol and diesel prices looks "inevitable" even though the increase may not be of the order of Rs 10 and 5 a litre respectively sought by the Petroleum Ministry.



"It (price rise) is inevitable," Petroleum Secretary M S Srinivasan said referring to Rs 2,00,000 crore under- realisation expected by public sector oil Companies this year on sale on petrol, diesel, LPG and kerosene because of the surge in global crude prices.



Indian Oil, Bharat Petroleum and Hindustan Petroleum are facing a huge liquidity crunch because of the government bar on raising prices and this could lead to petrol, diesel and LPG shortages as the companies would be left with little funds to import crude, whose prices have risen by around 50 per cent over the past year.



"The situation is alarming and we want to stem the rot at the beginning," he said, adding that the minister was pushing for a combination of auto-fuel price hike and a cut in customs and excise duties.



India imports about 70 per cent of its total crude requirement and government faces the twin challenge of containing import and subsidy bills and maintaining retail fuel prices at reasonable levels in an election year.



India imports about 70 per cent of its total crude requirement and government faces the twin challenge of containing import and subsidy bills and maintaining retail fuel prices at reasonable levels in an election year.



Petroleum Minister Murli Deora has apprised the Prime Minister of the situation arising from crude touching 135 dollars per barrel and said, "A decision needs to be taken immediately." "The Prime Minister is concerned about the financial health of the PSUs and he has asked his Principal Secretary to meet Secretaries of Finance and Petroleum along with the heads of the three oil Companies to reconcile differences on the issue," he said.

The Petroleum Ministry was also seeking lowering of customs duty on crude from 5 per cent to zero and import duty on petrol and diesel from 7.5 per cent to 2.5 per cent.

Besides, the Ministry was seeking cut on excise duty on the two products.



Making matters worse for policymakers is the fact that the option of issuing oil bonds is increasingly difficult. Analysts are also questioning the rationale of passing on the burden of rising prices to the future generations by long-term bonds to oil companies.



Analysts said the government has to do delicate tightrope walk between containing subsidy bill that has crossed the Rs 1,00,000 mark, maintaining profitability of oil companies and avoiding political backlash by executing a sharp rise in retail prices.



“The government has limited options,” said Delhi-based economist TK Bhaumik. “The silver lining, however, is it has a comfortable cushion in fiscal deficit that is budgeted at 2.5 per cent of GDP in 2008-09 and allows the leeway for raising the levels of subsidy to tide over the current crisis.



Economists also said a rising oil import bill is one of the contributing factors for the slide in rupee in recent days, at least to the extent it widens the current account deficit.



Experts feel the rise in crude oil prices would exert inflationary pressures and widen the trade deficit. “It will surely have an inflationary pressure, more so in unregulated products such as aviation turbine fuel,” said DK Joshi, principal economist, Crisil. “Moreover, the import bill will go up and widen the trade deficit.”