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Petro punches: a deeper look at the oily mess

At a time when rising prices are already pinching pockets and an economic slowdown is persisting, was the petrol price hike really required? Anupama Airy reports. Oil sector, milking cow| Import bill

business Updated: May 30, 2012 01:08 IST
Anupama Airy
Anupama Airy
Hindustan Times

The government last week hiked petrol price by Rs. 7.54 a litre — the steepest so far, drawing protests from Opposition and consumers alike. A sudden rise in global crude oil prices and a falling rupee at home were cited as the main reasons for the rise. Since India imports more than 80% of its crude oil requirements, a falling rupee poses problems. But what is oil economics all about? A rundown.

Why the sudden hefty rise in petrol prices?
Since petrol is a decontrolled product, its prices are fixed by oil companies in line with global markets. So any surge in global prices leads to an increase in the domestic prices of petroleum products. While the government compensates oil companies for keeping the prices of diesel, LPG and kerosene below the actual cost price, it does not give any subsidy for petrol. With spiraling global crude prices, oil firms estimated losses on petrol to have crossed Rs. 4,890 crore and went in for such a steep hike.

Why were petrol prices not adjusted since December 2011?

The main reason has been the government’s vote bank. Oil companies had last increased petrol prices on November 4. Thereafter, due to assembly elections in five states, the government issues informal diktats to oil firms, asking them not to increase the petrol prices. The budget session of Parliament and the smooth passage of the Finance Bill also ensured that there was no hike in prices.

What about diesel, LPG (cooking gas) and kerosene prices?
Prices of diesel, kerosene and cooking gas are fixed by the government. Their prices were last raised in June 2010. Diesel has a cascading effect on prices of all commodities and fuels inflation. Still, fearing a huge impact on consumers and political repercussions of this measure, the government has held back the price rise of these fuels.

What are under-recoveries of oil firms?
The three state-owned oil companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum — import crude oil, the basic raw material for refineries, by spending billions of dollars every year. However, due to government control, companies are unable to freely price the end products from refineries including diesel, LPG (cooking gas) and kerosene in general and petrol to some extent. This results in losses on the sale of these fuels in the domestic market. These losses are called under-recoveries. Under-recoveries of oil firms stood at Rs. 138,541 cr in 2011-12.

How are oil companies making huge profits despite huge under-recoveries?

The bailout package by the government every year — going out of taxes paid by the public — has actually saved oil companies from posting losses in all these years. The government paid Rs. 68,481 crore as subsidies to the three oil firms in 2011-12 and has recently given another Rs. 38,500 crore for the fourth quarter of 2011-12. The combined profit of the three oil firms stood at Rs. 10,531 crore in 2010-11 and Rs. 13,050 crore in 2009-10.

How do global oil price movements affect the profitability of oil firms?
The average price of crude oil that India imports was $85.1 a barrel in 2010-11 and has increased to $111.9 a barrel in 2011-12 and to $117.1 a barrel in the current fiscal year, making oil imports costlier.

What is the relationship between a falling rupee and oil prices?
The Indian rupee has also weakened significantly against the US dollar since April 2011. The rupee, which was around Rs. 44.37 against a US dollar during April 2011, recently crossed Rs. 56 against the dollar. It is estimated that every Rs. 1 depreciation in the Indian currency against the US$ increases the under-recovery of oil companies on fuel sales by about Rs. 9,100 crore per annum. This results into an increase of Rs. 8100 crore in fuel subsidy by the government.

What are subsidies and who bears it?
Oil companies are compensated by the government for their losses (or under-recoveries) on selling fuel below the cost price in the domestic market in the form of cash assistance or subsidy. Subsidies are paid out by the government to compensate oil firms for losses on selling petro-products below the cost price. Oil firms had borrowed R1,27,926 crores during 2011-12 to meet their working capital requirements or the cost of crude oil imports. They had even warned of supply disruptions of fuel in the domestic market.

What is the price build-up of petrol and diesel?
On petrol priced at Rs. 73.18 a litre (in Delhi), the consumer pays Rs. 27 as taxes, with Rs. 12.20 being charged by states as sales tax and another Rs. 14.78 flowing into the Centre’s kitty in the form of excise duty. In the absence of these taxes, you will have to pay R46.16 a litre inclusive of Rs. 1.50 a litre of dealer’s commission for filling your car at the petrol pump. Similarly on every litre of diesel at Rs. 40.91 a litre (in Delhi), the consumer pays Rs. 7.42 as taxes. States are charging around Rs. 4.5-9 a litre while central taxes and duties amount to Rs. 2.96 a litre.