Falling Re dampens hopes of fuel price cut despite 30% fall in Indian basket

Written by Anupama Airy | New Delhi, Oct 8 | Updated: Oct 9 2008, 05:48am hrs
The price of crude oil that India imports has fallen by almost 30% since June 2008, when the government increased the domestic retail prices of petrol and diesel and cooking gas (LPG) by Rs 5 a litre, Rs 3 a litre and Rs 50 a cylinder, respectivelythe steepest rise ever announced by the government.

Therefore, as a result of this steep fall in crude oil prices, the ruling UPA government is under severe pressure from its political rivals to reduce the prices of petrol, diesel and cooking gas. FE met petroleum minister Murli Deora to understand what is the governments thinking in this regard.

Asked if domestic fuel prices will be reduced, Deora answer was a big NO. Political compulsions apart (as elections are round the corner), which of course he did not comment upon, Deora explained how it did not make any economic sense to reduce the prices of fuel.

There is no doubt that the crude oil prices have fallen significantly in the past few months. But the benefit of this softening has largely been offset by the recent depreciation of the rupee, Deora said. The rupee has depreciated by around 18-19% since April 2008 from Rs 40 per US dollar to the current levels of Rs 48 per US dollar.

Another interesting point that Deora made was that the domestic retail prices of petrol, diesel and LPG at the time of revision in prices (on June 5, 2008) were equivalent to Indian basket of crude oil of $66 per barrel. I am told by my officers that with the recent depreciation of rupee against the dollar, the current retail prices now correspond to $61 per barrel of Indian basket of crude oil, he said. This means that although the Indian basket of crude oil was around $129.72 a barrel in June 2008, the domestic fuel prices were adjusted to a crude oil price level of $66 a barrel, thereby still leaving the state-owned oil marketing firms with huge under-recoveries on sale of these products in the domestic market. And now with the depreciation of the rupee against the dollar, the current prices of petrol, diesel and LPG actually correspond to a price of $61 a barrel of the Indian basket of crude oil.

Consumers are still being insulated from the impact of volatility in global oil prices as also the rupee-dollar equation on the home front. Even after a 30% fall in the price of Indian basket of crude oil, the required increase in retails price of petrol (at Delhi) stands close to

Rs 4.68 a litre, diesel by Rs 11.48 a litre, kerosene by Rs 28.07 a litre and LPG by Rs 322.14 a cylinder.

To understand the issue of mounting under-recoveries of the oil companies due to non-revision in prices, it may be mentioned here that the oil marketing companies pay trade parity price to refineries when they buy products like petrol and diesel and import parity price to refineries for PDS kerosene and domestic LPG. It is due to the governments intervention that the state-owned OMCs are selling petroleum products much below the price level required by international oil prices. It is the difference between the required price based on trade parity/import parity and actual selling price realized (excluding taxes, dealer commission) which represents the under-recoveries of oil companies.

When contacted, a senior IOC official said that for October 2008, the under-recoveries of the three OMCs-Indian Oil, HPCL and BPCLwould be around Rs 12,000 crore. If the international oil prices remain at current levels during the rest of the fiscal year and retail prices remain unchanged, the total under-recoveries of OMCs during 2008-09 are estimated at around Rs 1,65,000 crore.

OMCs have been borrowing heavily for financing their working capital and capex requirements. The combined borrowings of OMCs which stood at Rs 48,400 crore in March 2007 and Rs 66,900 crore in March 2008 have increased to Rs 93,500 crore as of August 2008.

The credit limits of the OMCs have recently been enhanced by Rs 14,000 crore to enable them to meet their fund requirement till the end of October 2008. Officials said the interest burden of OMCs during 2008-09 is expected to go up by Rs 4,200 crore compared to previous year due to increase in borrowings and higher rate of interest. The three public sector OMCs had reported a combined loss of Rs 1,539.69 crore during the first quarter of 2008-09.

Therefore, Deoras reasoning is justified when he says that there is no valid reason for downward revision in domestic fuel prices. The international crude oil and petroleum products prices at current levels are still higher than the prices at which domestic retail prices are fixed.

However, Deora agreed that this justification is not sufficient to convince his partys political rivals. I dont want to comment what will be the political fallout of the softening of crude oil prices. That is a decision which I cant take, he said.