While the political verdict may still be at a variance, petroleum minister Murli Deora has been told by his ministry’s advisory body ?Petroleum Planning and Analysis Cell (PPAC)? that any downward revision in the prices of the four sensitive products (petrol, diesel, LPG and Kerosene) at this stage will only aggravate the financial health of the state-owned oil marketing companies (OMCs).
PPAC advises the petroleum ministry on almost all major policy issues. This time around, PPAC’s advice was sought in the light of the statement made by Deora in the Parliament (on October 23) that the government was examining the possibility of reducing the consumer prices of sensitive petroleum products and would shortly make an announcement in this regard. PPAC was asked to weigh the pros and cons of reducing the retail selling prices of petroleum products and give its advice?suggesting the best course of action.?
Advising a wait and watch approach, the PPAC (in its verdict of October 30 to the petroleum ministry) said,?Any downward revision in the pricing of petroleum products cannot be decided on the basis of daily fluctuations. The price of crude that India imports would have to fall below the level of $55 a barrel on sustained basis for a specific period of time before a decision to cut retail prices could be considered,? it said.
Even through the Indian basket of crude oil has fallen by around 55% (from $129.72 a barrel?at the time of last revision in the domestic fuel prices?to $58.93/bbl, as on October 29), the average price of the Indian basket of crude oil during 2008-09 is still high at $110.41 as against the average crude price of $79.25 per barrel during 2007-08.
Sharing PPAC’s logic against a fuel price cut at this stage, Rajiv Kumar, director Icrier said,?Rupee depreciation has completely offset the fall in international crude oil prices. The budget estimates were made assuming the price of oil at $ 71 a barrel. Since then the rupee has depreciated by nearly 21%. I would not suggest a cut in domestic oil prices right now as the landed prices of oil has not lowered since the Budget. So reducing oil prices domestically would hurt the fiscal situation. The government has to ultimately make a choice.?
However, PPAC did agree that an reduction in prices of sensitive products together with the ongoing decline in prices of free products (like jet fuel, naphtha and furnace oil) will have a larger impact on moderating inflation and help in bringing it down to a single digit level.
At the same time, it also warned that the global oil and financial markets are in a state of flux and the uncertainties have only increased on account of impending policy measures that may be decided by the governments of both the developed and developing countries to put the global financial markets back on track.
?Considering the grave financial position of OMCs and the liquidity constraints faced by them, as also the need to contain the run-away growth of transportation fuels particularly diesel any downward trend in the selling prices of the sensitive petroleum products would only worsen the existing conditions,? the PPAC told the ministry.
The combined losses of the three state-owned OMCs-Indian Oil, HPCL and BPCL-in the second quarter ending September 30 stood at Rs 13,000 crore as against a loss of Rs 1,540 crore in the first quarter of the current fiscal. Even after accounting for the current decline in the international oil prices, the annual under-recoveries of OMCs for the fiscal are estimated at around Rs 1,25,000 crore, which is already higher by over 50% compared to the last year.
?Managing this magnitude of under-recovery in the face of economic slowdown has already increased the burden of the government. Further reduction in the prices (of fuel) will only aggravate the situation,? PPAC said.
Even as the OMCs are estimated to make positive margins of around Rs 3.39 a litre from November 1, the other three products will still continue to be sold at a loss. While diesel will be sold at a loss of 82 paise per litre, the losses on kerosene and LPG will be much higher at Rs 21.50 per litre and Rs 331 per cylinder respectively. The under-recoveries of OMCs in November, after netting the positive margins on petrol, are estimated to be around Rs 4,000 crore.
Every drop counts
• PPAC advises the petroleum ministry on almost all major policy issues
•This time around,PPAC was asked to weigh the pros and cons of reducing the retail selling prices of petroleum products and give its advice?suggesting the best course of action
•Advising a wait and watch approach, the PPAC (in its verdict of October 30 to the petroleum ministry) said,?Any downward revision in the pricing of petroleum products cannot be decided on the basis of daily fluctuations
•PPAC did agree that an reduction in prices of sensitive products together with the ongoing decline in prices of free products (like jet fuel, naphtha and furnace oil) will have a larger impact on moderating inflation and help in bringing it down to a single digit level
•At the same time, it also warned that the global oil and financial markets are in a state of flux and the uncertainties have only increased on account of impending policy measures that may be decided by the governments of both the developed and developing countries to put the global financial markets back on track