It’s an oily blow once again

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With crude still at a high, what will happen to the burnt-again OMCs?

The start of 2008 saw global crude oil price gushing past the $100-mark for the first time in history. Although it returned to normal levels within a week, it certainly guaranteed a more persistent pain for oil importing nations like India, who find it difficult to cope up even with the $90-mark. So, what do we do now? “Crude prices have crossed the $100-mark and as such we are bound to raise fuel prices,” announced Murli Deora, Minister for Oil & Natural Gas. “But it would be minimal,” he immediately indicated.

It definitely appears to be the right move considering that even a slight rise in retail fuel prices might add on to the inflationary pressures which, at present, is at its highest in last four months (at 3.79% for the week ended January 5, 2008). But then, it boils down to this single question: If not the consumers, then who is going to feel the brunt? Well, the burden of losses once again will fall on the shoulders of the oil marketing companies (OMCs) like HPCL, BPCL and IOC, which are already heading towards combined under-recoveries of Rs.697 billion for FY 2007-08. All this is thanks to government policies and current price scenario that is making them lose Rs.10.60 per litre on petrol, Rs.11.60 per litre on diesel, Rs.331.4 per LPG cylinder and Rs.19.89 a litre on PDS kerosene.

Moreover, with fuel prices not being raised since June 6, 2006 (although the international crude prices have increased sharply in the past six months), these OMCs seem to be the worst hit. According to industry sources, India’s crude basket has risen by about 170% in last three-and-a -half years, with crude prices reaching $88.18 per barrel (on January 22, 2008) from $32.37 in April 2004. However, during the period, retail prices of petrol have gone up by just 29% and those of diesel by 40%. So, what does a company do when its input costs rise manifold but is able to pass on only a small portion of that to its consumers? Nothing but just wait and watch (of course if it happens to be a PSU) till the government intervenes.

However, Rohit Nagraj, oil and gas analyst, Angel Broking prophesies, “The quantum of losses will surely cross Rs.700 billion for FY 2008-09. Of this, the government is likely to bear the burden up to 42%, while 33% of the same should be borne by subsidy prime companies.” No doubt, to partly compensate the losses of state-owned OMCs, the government has already issued bonds worth Rs.112.57 billion to them. But then what about the rest? Thus, to fight escalating global crude prices, the government will also have to juggle with the duty structure of petroleum products. It will have to use the twin weapon of waiving off the majority of price taxes in petroleum products along with reducing the excise duty on these products or else it’s a hard blow for OMCs once again. But then, will it do it and lose revenues?

B&E edit bureau: Ratan Lal Bhagat

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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