When state-owned oil marketing companies (OMCs) raised prices of diesel by 45 paise a litre a month ago as part of an overall plan to eliminate R1 lakh crore worth of subsidies on this fuel over a period of time, not too many were impressed. Because, while doing so, the Cabinet raised the cap on the number of subsidised cylinders each family could get per year from 6 to 9. While the raised cap put an extra burden of R9,300 crore on the OMCs, the 45 paise hike in diesel prices fetched just R3,100 crore (on a full year basis)thats R780 crore for what was left of the year. Hiking prices of diesel sold to bulk usersdefence, railways, power plants, industrial users, state transport organisationsto market levels, another decision taken the same day, theoretically cut diesel subsidies by another R14,400 crore. Thats R3,600 crore for what was left of FY13, but the fact that around 30-40% of bulk users are dodging the price hike by buying in retail has reduced this benefit commensurately. In other words, it was clear last month that not even a dent had been made in cutting the diesel subsidy of, at that time, R9.6 per litre.
With last weeks diesel hike of another 45 paise per litrealong with a R1.5 per litre hike in petrol pricesthings look a bit better. Apart from the fact that diesel subsidies will now be down by another R3,100 crore (though on a full-year basis), it does suggest the OMCs are going to be allowed to hike prices for a bit. Even a betting man, it is true, would worry about the odds of the government hiking prices by 45 paise every month for the next 20 months or soand thats assuming that global prices dont riseat a time when elections are due next year. Since last month, crude prices have hardened from $109 to $113, which is why the diesel under-recovery, at R9.6 a litre in January is, according to IOC, up to over R10 a litre now. The big challenge for oil companies, apart from ensuring that bulk buyers like state road transport organisations are not able to access retail markets, will be to deal with the finance ministrys plans to lower under-recovery payments by adopting a different method of calculating thesea committee will examine this proposal. Its still a bit early to rush out to buy those OMC shares.