With the softening of global crude oil prices by over 50%, from a high of $147 a barrel to less than $68 a barrel, the petroleum ministry?s proposal for a differential pricing mechanism for diesel has died a natural death. The finance ministry has decided to keep the proposal in abeyance following the fall in international prices of crude and petroleum products.
While the railways and state transport corporations have been kept out of the ambit of the scheme, the fact that supplies to the defence sector constitutes a major portion of bulk sales of diesel by oil marketing companies (OMCs), the proposal has been opposed by the ministry of defence.
Official sources said that another proposal doing the rounds is that since subsidised diesel is consumed in a large way by the upper middle class and high-end consumers for their diesel cars, a special excise duty be levied on these vehicles, which also include sports utility vehicles. This, officials said, is under active consideration by the government.
Under the differential pricing of diesel, it was proposed to allow OMCs?Indian Oil, Bharat Petroleum and Hindustan Petroleum?to charge market-driven prices from bulk/direct consumers, including defence, power, marine (excluding fisheries) and other industries, besides the export-oriented units and the special economic zones. It was felt that consumers in these sectors have the capacity to pay higher prices for diesel.
The petroleum ministry also prepared a draft note for the Cabinet Committee on Economic Affairs for implementation of this proposal. The petroleum ministry had proposed keeping the common man and also the railways and the state transport corporations out of its purview. If implemented, the proposal would have helped reduce under-recoveries of OMCs by Rs 9,000 crore annually.
However, officials said the proposal was mooted at a time when crude oil prices were climbing and under-recoveries of the OMCs mounting, especially on sales of diesel. The total under-recoveries of OMCs were estimated to be Rs 1,71,078 crore by the first week of September. Diesel alone constituted 58% of the total under-recoveries for the current fiscal.
Senior oil ministry officials have confirmed that the proposal has been put on the backburner following a sudden reversal in the price trend of crude oil and petroleum products in the international market. The implementation of the proposal was also expected to check the growing diversion of diesel, a subsidised fuel, to commercial and industrial sectors.
Growth in the consumption of diesel had become a major cause of concern; sales grew by about 17% during April-July 2008. This was mainly on account diversion for unintended purposes: diesel was being used as a substitute for furnace oil, naphtha and LDO for power generation.
Even the recently submitted high-powered committee on the financial position of oil companies headed by Planning Commission member BK Chaturvedi, while proposing a constant price hike on auto fuels over a period, had suggested differential pricing for diesel to industrial and commercial users. The committee had observed that that industrial use of diesel should not be eligible for subsidy and, therefore, the sale of diesel to industrial and commercial users be made at market prices.