Govt policy on oil prices is crude at best

Petrol prices have been revised six times within six months after their deregulation in June 2010. Some media reports said it was for the fifth time when the price was last hiked by Rs2.95 on December 14, 2010. Difficult to say which one was right. We lost the count as the newfound freedom enabled the oil marketing companies (OMCs) to revise them so frequently. Another, or, may be, many more, upward revisions are imminent. That is exactly what the justification, for the hike, trumpeted out by the OMCs and government spokespersons, suggests.

The OMCs said they were still considerate when they hiked the price of petrol by Rs2.95 a litre against the actual requirement of   Rs4.17 based on the high crude oil prices then prevailing. Thus, they feel sad having lost Rs1.22 on every litre.

Up, up and above
The international crude price have subsequently gone up further; the Indian basket reached to a level close to $90 a barrel by second fortnight from a little less than $88 the previous fortnight. The current financial year’s average is $79.35, up 13.74% from the 2009-10’s average of $69.76.

Goldman Sachs forecast that it will peak to $100 in 2011 and $110 the next year; so the price of petrol too will move further - up, up and above.

The diesel prices, too, will surely go up when government, allows them at an opportune time. Though the price of diesel was
decontrolled together with petrol, it was with a rider that it should be done with the approval of the government.

Public sector oil companies are therefore pressuring the government for the hike and the private companies though increased the price to some extent cannot go whole hog unless the former take a lead. They can’t sell their produce at a high price when government outlets sell cheap; so, they are equally interested in the government decision of price increase.

And the government cannot allow this when the inflation is very high; now it is close to 9% and the curve is moving northward without a let up.  Unleashing the diesel and other sensitive
petroleum product prices would worsen the situations, which is not politically expedient now.

But, surely, the UPA government is committed to fully decontrolling the petrol and diesel prices while moving ahead to reduce subsidies on other products such as kerosene and cooking gas. Its idea is to make petroleum industry more profitable to make the private entry more attractive besides garnering as much money as possible to fill the budget deficit in the meantime. In the process, the OMC losses are shown under a magnifying glass.

Misleading projections
While government’s claims and experts’ analyses seek to show a huge hole in the OMCs’ profits and government’s kitty on account of untenable international crude prices, a closer look at official data themselves prove that the exercise is to mislead the people in order to get the acceptability for the continued hike in the prices of petroleum products.

The crude price in the year 2009-10 averaged $69.76 a barrel — roughly equal 159.99 litres. This is to say, $0.43 a litre on an average or Rs19.62 assuming the exchange rate of Rs45 a dollar. Parik committee says that 90% of the input cost of the refineries is crude. That means the cost of the final product would be Rs21.58 before taxes.

When rupee value firms up the imported product becomes cheaper to that extent. So will be the gains on exports, get affected with the variation in the value of exchange rates. All this is to suggest that the exchange rates too have their impact on profits; not the international prices alone.

And what about that 20-30% of the crude that is locally available and its cost? It need not be equal to the international market price. Actual cost cannot be worked out without factoring in this advantage.

Also the refining capacity in India is higher than the domestic demand. As per the petroleum ministry’s statistics, 50.97 million tonnes (mt) of petroleum products were exported against the import of 23.49 mt during 2009-10. The total domestic consumption during the year was 138.196 mt.

The current refining capacity in India is 182.09 mt, which is likely to shoot up by the end of 2011-12 to 255.83 mt, as per the Planning Commission’s estimate. This is 6% higher than its original estimate of 240.96 mt. This suggests that the industry is going to flourish further.

Postscript
Another hike has been affected by the time writing of this article was completed. This hike is reported to have created a furore by the Trinamul Congress, a UPA ally, besides the opposition parties.