Centres Diwali bonanza: fuel price cut likely

Written by Anupama Airy | New Delhi, Aug 19 | Updated: Aug 21 2008, 04:24am hrs
With an eye on the general elections, the government after announcing a hefty increase of 50% in the wages of the central government employees, is once again preparing to reward its voters.

If the ongoing fall in international crude oil prices by over 23% (from the record high of $147.25 a barrel in July to the present $111) stays till October, it may actually turn out to be a Diwali bonanza for the consumers of petrol, diesel and LPG.

A senior government official told FE that the consumer price of the three fuels could be lowered marginally if the Indian basket of crude oil continues to stay below $112 a barrel mark. After touching a record high of $142.04 a barrel on June 3, the Indian basket of crude oil has come down to $107.93 a barrel on August 15, 2008.

The Cabinet will meet in October to review the global crude oil price scenario and its impact on domestic fuel prices. With inflation currently at 12% levels, the government is desperately looking at ways to bring down prices. If the crude oil prices do not play a spoil sport, there is a strong possibility of reducing domestic fuel prices, the official said.

The recent hike in the prices of the three fuels in June this year, following a steep hike in international crude oil prices, has been the highest so far, when petrol became dearer by Rs 5/lt, diesel by Rs 3/lt and LPG by Rs 50 a cylinder.

However, oil companies say that any such move may prove to be detrimental to their interests. We had a bad Q1 and with the lowering of refining margins (due to fall in crude oil prices), the Q2 is going to be bad again. The pressure on financials has already resulted in cash shortages. Any such move by the government will have a strong impact on the oil companies and should be avoided, said an oil company official.

There is no denying the fact that continued cash losses are making the operations of oil PSUs unviable besides sapping the ability of the navrtana oil PSUs to generate internal resources for future investments. The tight liquidity position of the oil marketing companies is causing constraints in their day-to-day operations and making it difficult for them to even make timely payments for purchasing of crude oil.

The OMCs, which have been borrowing heavily for their working capital requirements, are resorting to cutting on import of petroleum products to reduce their growing under-recoveries. For a country like India, where import dependence for oil and oil products is over 75%, any disruptions in imports will result in shortages of sensitive petroleum products eventually leading to supply disruptions in the country.