March average for India crude basket soars past $110

Much to the woes of the oil marketing companies, the price of the Indian crude basket rose to $110.72 per barrel in March 2011 — up nearly 9% over the previous month and a staggering 42% year on year.

If this trend continues — and indications are that it will, as in the initial days of the current month, crude oil is ruling at a two-and-a-half year high — the annual average for 2011-12 is unlikely to dip below $100; this average stood at $85.06 for 2010-11.

The inevitability of a hike in diesel, kerosene and LPG stares in the face, but the government is expected to dither in view of the state elections and the raging inflation fever; the resulting public outcry is also a consideration.

In short, therefore, an under-recovery of well above Rs1.70 lakh crore is likely this year as against Rs78,000 crore in 2010-11. In that year, though, the markets were volatile, the price movements were narrow during the first half, with the monthly average for the Indian basket fluctuating between $73.54 in July and $84.08 in April.

But in the second half, the direction was northward and the pace of ascent rather strident — from $81.11 in October to $110.72 in March.  This year, the market has been bullish from the start and the crisis in the Middle East and the North African countries threaten to perpetuate the hardening sentiment.

So, with a loss of Rs16.76 per litre of diesel and of over Rs23 in kerosene and Rs315 per cylinder of LPG  today — the under-recovery  is bound to increase if crude prices soar even higher — the financials of the oil marketing majors do not look good in the new fiscal.

To compound their worries, after the last revision in petrol which was effected in mid-January, there has been a status quo. As such, they incur a loss of Rs4.50 per little on this item. Petrol was deregulated in late June 2010 and has been frequently revised in tandem with the crude price changes.

Despite the surging Indian basket in the final quarter of 2010-11, some sort of informal freeze in its price seems to be in place.
This is hard to understand, as petrol is a final consumption product catering, it may be safely presumed, to a section of the population which can well absorb the increase in its selling price.

It may be noted that, in respect of aviation fuel, the oil companies have effected recently the 12th revision since October last but in the case of petrol, the hesitancy is puzzling. In the event, they may have to foot the bill for the loss suffered in selling petrol below the refinery gate price as the sharing formula applies only to the three sensitive petroleum goods.

Where does this leave the fisc? The Centre has provided for a petroleum subsidy of only Rs23,640 crore for 2011-12. This may be a gross under-estimation and the amount may be higher. If this scenario materialises, it would be a repeat of what had happened last year, with the revised petroleum subsidy, at Rs38,386 crore, overshooting the budgetary provision of Rs3,108 crore by a whopping 1,135%.

The practice of issuing oil bonds has ended but if the budget underestimates the expenditure of the government by under-provisioning of this sort — and later incorporates this spending in the supplementary demands for grants — the credibility of the budgetary process is undermined and the resulting higher than anticipated fiscal deficit calls into question its commitment to fiscal discipline.   

A stitch in time, it is said, saves nine. By delaying the price revision for political and short-term considerations, the government may be obliged to make a steep hike in the price of petro goods at one go at a later stage.

Across much of the world, the rising crude oil price is transmitted automatically to the consumer, who may grumble but  understands  the ruthless Darwinism of the market place. In India, the people are insulated from this global practice and the upshot is little incentive to economise and conserve the use of this fuel.
It was to put an end to this system that the Kirit Parikh panel had made a series of far-reaching recommendations. Now, this document is effectively moth-balled and the old order is firmly in place.