Damned if they do
New Delhi 27-Dec-2010
Oil marketing companies in India are beginning to pile up massive losses yet again as the price of crude touches $90 a barrel. Under-recoveries, as they are called in government parlance, have grown to the point where deregulation of the oil sector has started looking as the only way out. The Government's headache is serious-whether to subsidise OMCs, a costly economic proposition, or pass on the higher prices to consumers, an equally costly political proposition.
The Government can ill-afford to do nothing. Global crude oil prices are unlikely to fall drastically any time soon. As the global economy recovers, demand will only increase. Prices had been on a steady upswing even before this latest spike, reaching as high as $72-74 per barrel in June. According to Goldman Sachs, world demand in the first eight months of 2010 was 2.7m barrels per day higher than in the same period in 2009. In 2011, the fundamentals of supply and demand are likely to exert more upward pressure on prices. Bank of America Merrill Lynch reckons that global demand is set to expand as growth in developing countries like China and India offsets a decline in demand from sluggish rich countries, pushing prices to $100 per barrel next year. Moreover, non-OPEC (Organisation of Petroleum Exporting Countries) supplies, which have grown in recent years, may start to decline in 2012, creating the conditions for a price of $100 per barrel.
The average price of the Indian basket of crude oil has jumped from $50.14 per barrel in April 2009 to $89 per barrel in December. The three public sector fuel marketers-IndianOil, Bharat Petroleum, Hindustan Petroleum-are projected to lose Rs 65,839 crore in revenues on selling fuel below imported cost, up from Rs 31,367 crore during April-September 2010.
Statistics reveal that the Government's half-hearted deregulation of the oil sector in June-an EGoM had freed petrol prices and committed to freeing diesel prices in due course-hasn't solved the oil subsidy headache. The OMCs are selling diesel at a discount of Rs 4.71 a litre. They also lose Rs 272.19 on the sale of every 14.2-kg LPG cylinder and Rs 17.72 per litre of kerosene. The price of petrol has been raised four times since the deregulation in June but there continue to be under-recoveries, which are estimated to touch Rs 90,000 crore this fiscal.
The OMCs are clear on what they want. Says IndianOil Chairman B.M. Bansal: "Consumers should pay for what they use. If the Government oil companies are not allowed to make profit and sell at market-determined prices, they will become unviable. Companies are selling gas at prices which are unrealistic and uncompetitive. These factors make the oil and gas business highly risky and uncertain." The situation is complicated by a Government diktat that dates back to fiscal 2004-05, when upstream companies (ONGC, GAIL, OIL) were made to share one-third of the losses on the four key oil products. These companies need funds to invest in exploration and new assets, particularly overseas.
The UPA Government is wary of raising prices as inflation still hovers just under the 10 per cent mark. It is also under tremendous pressure from the Opposition on the 2G spectrum scam, and may choose to avoid another controversy. Still, a price hike and deregulation of diesel prices are not ruled out. According to Petroleum Secretary S. Sundareshan, "If global crude oil prices show no sign of abating, the Government will have to take a view."
Sure, there are not too many alternatives at this point, but some feel that given the upward trend, it is high time the Government created an institutionalised mechanism to share the burden in a timely manner. "While the Government has provided cash or oil bonds, the absence of such a mechanism has often resulted in delays in support and the oil companies have faced volatility in cash flows," suggests Pawan Agrawal, director, CRISIL Ratings.
The Government may yet stand to regret the missed opportunity for complete deregulation when global oil prices were hovering well below the $50 per barrel mark in the aftermath of the global economic downturn in the summer of 2009. If the Government did not continue to retain the power to fix the prices of oil products domestically, it would have a milder headache when global prices shot up internationally.
