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Oil prices likely to be reduce further

business Updated: Jan 25, 2009 12:10 IST

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The much-anticipated reduction in fuel prices may see petrol prices being cut by Rs 5 a litre and diesel rates by just Re 1 per litre, lower than the speculated rates as the government plans to take away part of the gain from falling global oil prices through higher taxes.

Petroleum Minister Murli Deora has been talking of a reduction in prices of petrol, diesel and domestic LPG since the last week of December, but no date have yet been fixed for a formal announcement.

Officials said the fall in global oil prices has resulted in handsome margins on sale of petrol and diesel sales, but not all of it would be reflected in the cut in the retail selling price, as Finance Ministry wants to take away some of the gain by raising excise and customs duty on the two fuel.

"Retailers are currently making a profit of Rs 9.86 a litre on petrol and Rs 3.48 a litre on diesel. But after a Re one per litre increase in excise duty and 2.5 per cent hike in customs duty, petrol price is likely to be cut by Rs 5 a litre and diesel by Re 1," a senior official said.

There is no consensus on the rate of reduction in LPG prices, as oil companies are resisting the move because they continue to lose Rs 32.97 per cylinder. "The political establishment wants Rs 20-22 per cylinder reduction," he said.

A parallel proposal to free auto fuel pricing that would have meant rates being adjusted every fortnight in sync with global prices, is being opposed as a retreat in international oil prices would mean a price hike on the eve of General Elections.

Last month, petrol price was cut by Rs 5 a litre and diesel by Rs 2 a litre and the Oil Ministry had on at least one occasion this month done the necessary paper work for the second reduction, but the proposal did not reach the Cabinet.

"Closely linked to free pricing is the issue of how to deal with the revenue loss on domestic LPG and kerosene. If auto fuel prices are to be freed, a mechanism for making good the losses on cooking fuel has to be formulated," the official said.

The fall in international oil prices has resulted in near wiping away of the ability of upstream firms like ONGC to bear a part of those losses. "So, the losses on LPG and kerosene should be compensated by the government. In what form, either from budget or through oil bonds, will have to be decided by the Cabinet," he said.

State-run oil firms are expected to log Rs 1,01,445 crore revenue loss on sales of petrol, diesel, kerosene and domestic LPG this fiscal. In July last year, when international crude prices touched an historic high of USD 147 a barrel, Indian Oil, Hindustan Petroleum and Bharat Petroleum together were projected to lose Rs 2,45,305 crore in revenues.

But with crude falling to four-year low, the losses have trimmed to Rs 1,01,445 crore, the official said.

The three firms are currently making a profit of Rs 9.86 a litre on petrol and Rs 3.48 per litre on diesel but continue to lose Rs 12.16 on sale of kerosene through public distribution system and Rs 32.97 per domestic LPG cylinder.

The basket of crude oil India buys has averaged USD 44.88 per barrel this month against the December average of USD 40.61 a barrel. Indian basket of crude has averaged USD 93.61 per barrel this fiscal as opposed to USD 79.25 a barrel average procurement price in 2007-08.