Slippery Slick

It’s an open secret. Fuel prices are likely to go up in the next few weeks. In fact, they should have gone up long ago. But no government would allow that to happen just before the polls. So, there were instructions sent out to public sector oil companies to wait a while. Post-elections, petrol and diesel could be dearer by 10 per cent, andLPG prices could rise by as much as 40 per cent. Well, slam on the brakes, turn that burner to sim and get ready to take the hit on your pocket. 

Agrees former finance minister and senior Congress leader Manmohan Singh: "There’s an informal pressure on oil companies not to raise prices. This defies economic logic. What is the use of dismantling administered prices if this kind of pressure is exerted on companies?" But the government asserts there is no attempt to control prices. According to petroleum minister Ram Naik, it was up to the oil companies to decide on price hikes. Speaking to the media last week, he also said, "all fears of a (post-election) price hike are baseless and speculative".

That sounds slightly difficult to digest in view of the facts. Petrol and diesel prices were last revised on December 31, 2003, while those ofLPG and kerosene have remained unchanged for the last two years. And this is despite all indications that they should have gone up. Consider automotive fuels for instance—global crude prices have jumped nearly 18 per cent in the last five months. The price of the benchmark Brent crude is now $33 a barrel, compared to $28 in November-December 2003. 

This has put the domestic firms, most of whom have sustained heavy losses in the last few months, in a fix. Estimates indicate they lost Rs 2,000 crore during January-March this year since they had to absorb the additional burden. As India imports almost 70 per cent of its crude and petroleum requirement, changes in the global prices impact the bottomlines of the oil companies. An rbi estimate states that every $1 increase in global prices pushes up India’s annual oil import bill by $600 million.

Last month, Indian Oil Corporation (IOC), the country’s largest oil marketing company with about 60 per cent retail share, shot off a letter to the ministry seeking permission to raise prices of the two motor fuels. In his letter,IOC CMD M.S. Ramachandran sought the government’s nod to increase petrol prices by Rs 3 per litre and diesel by Rs 5. This, feelsIOC, was essential to check the Rs 1,000 crore loss every month being incurred by the public sector oil retailing companies. 

Sources point out that IOC’s desperation stems from the fact that refinery transfer prices, or the price paid to other refiners (not the ones that it owns), has gone up due to increase in crude prices without any corresponding revision in retail rates. The transfer price for diesel went up in all the fortnights since the last revision of ex-storage point price of petrol and diesel on January 1, 2004. For petrol, it was up in two fortnights. 

At the same time, India’s crude imports have risen. In 2003-04, demand grew nearly 4 per cent to over 107 million tonnes due to higher diesel consumption in the second half of the year. The country’s crude import bill increased to Rs 93,145 crore in 2003-04, compared to Rs 85,042 crore in 2002-03. This year, say officials, demand is estimated to grow by the same figure. But indigenous production hasn’t picked up in a significant way. 

When it comes to LPG and kerosene, the oil firms want "to bring the retail prices in line with the cost of raw materials," which they contend has increased by nearly 50 per cent in the last two years. Besides, the government subsidy on the two fuels has been cut by a third.This below cost sale ofLPG and kerosene has led to a huge loss of Rs 7,200 crore in the previous fiscal year. This loss was shared by both the marketing firms like IOC, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) and IBP, and the producers like Oil and Natural Gas Corporation (ONGC) and GAIL. IOC has estimated that if the prices of the two products were not increased, IOC and its group company IBP may be forced to take a whopping loss of Rs 6,900 crore in the current fiscal. Once again, estimates indicate that the increase for the two fuels is nearly Rs 5 per litre for kerosene, and Rs 6,621.79 per tonne—or roughly Rs 94.03 per cylinder—forLPG. And these were over and above the fixed subsidy levels for 2004-05 at over Rs 8 for kerosene and Rs 22.58 per cylinder forLPG. 

So, does this mean prices have to be raised next month? Says Manmohan: "Global crude prices are expected to stay high in the immediate future. Even the G7 countries expressed this in Washington recently. The revision has to be done sooner or later." But there are some who feel it won’t be necessary. Says a senior bureaucrat: "The oil companies’ profits have gone up consistently over the last few years. Such price increases should not really put a burden on them. Such fluctuations in global prices can easily be absorbed by them."BPCL chairman S. Behuria agrees. He feels that refining margins may be better this year, which might help absorb the spurt in crude prices in the last few months. He is also hopeful that the low energy requirements in summer months may soften crude prices and ease the situation in the coming months.

Yet another advantage comes in the form of the rising rupee that makes imports cheaper. The Indian currency has already appreciated by nearly 10 per cent against the dollar in the past year or so and that would have a similar impact on crude imports. Experts also feel that Indian crude importers invariably opt for long-term contracts (generally six months old). Hence, they are still purchasing crude at the then prevailing lower prices. As yet, they are not feeling the pinch of rising global prices and can afford to wait a bit before they will be forced to really increase domestic retail prices. 

However, at some stage prices have to go up. Political pundits say that the new government may opt for a phased increase in view of the sensitivities involved, especially in the case of kerosene and diesel. Also, the finance minister Jaswant Singh, if he retains his portfolio, will shy away from such dramatic increases that could have a multiplier effect on inflation. So, what you may witness is an immediate increase inLPG and petrol to the full extent, and a multiphase increase in the case of diesel and kerosene. Obviously, the new government will have to balance between hurting the consumers and the stark realities put forward by the oil companies.