The oil sector has been viewed with much gloom in recent times. But problems in the downstream oil industry shouldn?t take away from the performance and prospects of the upstream sector. India, with a total refining capacity of 146 million tonnes per annum, is the fifth largest oil refiner in the world. It plans to double its capacity over the next 4-5 years. India, a net importer of crude, is now a net exporter of oil products. This situation is likely to continue in the near future?supply of petroleum products is expected to grow at 7.9% per annum between 2006-07 and 2011-12, while domestic demand for the products will only rise at 3% per annum. Unlike the downstream players whose profits are being killed by soaring global oil prices and government controls, the margins for upstream companies are growing?the industry?s average profit from processing one barrel of oil has increased from $4.19 in 2006-07 to $9.02 in 2007-08. The margin was just under 1% in 2000-01 for public sector companies like IOC, thus making them more than nine times as profitable upstream, even as they have gone in the reverse direction downstream, during the same period.
In fact, India has a great potential to become a global hub for oil refining. Major private sector players like Reliance and Essar oil are expanding capacity. Major PSU players like ONGC and IOC are also planning to set up new units by 2012. The petroleum ministry is backing this initiative to make India a global player in the upstream oil industry, and is according the private sector a major role in capacity expansion. This is desirable. India also has locational advantages?it is geographically close to the Middle East where the majority of crude oil reserves are; it is also located in Asia which is a very large, and fast-growing, consumer region. In addition, refining is a dying industry in developed countries because of stringent environmental regulations and rising costs. Even in the Gulf, costs are estimated to be twice as high as in India. It?s a pity then that some quarters want the upstream oil sector to be taxed?the Left has proposed a windfall tax to subsidise the downstream oil losses. A sector with such potential should not be thrown into a populist tax and subsidy game. Plus, remember, if you tax profits when times are good there will be demands for subsidies when times are bad. That?s bad policy.
