Fuel price hike - Atasi Das

Leading public sector oil marketing companies, the esteemed Navratnas - Indian Oil, Bharat Petroleum and Hindustan Petroleum – have increased petrol prices by Rs 2.50-Rs 2.54 per litre from 16 January 2011. The hike has been prompted by the rising international crude oil prices. Alongside the political opposition (including the BJP and the Left parties), the ruling UPA (United Progressive Alliance) allies-the Nationalist Congress Party and the Trinamool Congress have also expressed their displeasure at the latest fuel price hike. AIADMK general secretary J Jayalalithaa has even demanded a rollback of the augmented petrol prices.

Petrol prices have increased by 13.4 per cent since its June 2010 deregulation. On 15 December 2010 prices were last hiked by around Rs 3 per litre by Indian Oil, HPCL and BPCL- leaving an under- recovery of Rs 1.25 on per litre of oil sold. The recent hike in international crude prices to $92 per barrel has widened the losses incurred to over Rs 2 per litre. Goldman Sachs has predicted that the international crude oil price will shoot up to $110 by 2012. After the hike, IOC is charging between Rs 58.37 to Rs 63.15 per litre in the metros; HPCL and BPCL have fixed prices at Rs 58.39 per litre. Indian Oil has stated that in accordance to the prevalent international crude oil prices, domestic petrol prices should have risen by Rs 3.72 per litre for a full recovery- this has been restricted to a Rs.2.50 per litre hike in view of consumer interests.

IOC, BPCL and HPCL presently suffer a loss of Rs 6.80 per litre on diesel, Rs 18.66 per litre on kerosene and Rs 366 on per domestic LPG cylinder sold. Diesel, kerosene and LPG comprise over 60 per cent of India’s petroleum product consumption-their prices have been kept static since 25 June 2010.

Analysis
Share prices of HPCL, BPCL and Indian Oil Corporation slipped by 2.10 percent, 1.85 percent and 1.04 percent respectively on 20 January 2011, reflecting the uncertainties over the pace of reforms in the oil industry, after a Union Cabinet reshuffle replaced Murli Deora with Sudini Jaipal Reddy as the new oil minister, in the wake of the latest fuel price hike. Oil exploration companies ONGC and Oil India and gas transmission and distribution firm GAIL (India) also recorded a slump in their share values.

The RBI had increased repo and reverse repo rates by 150 basis points and 200 basis points respectively in 2010-rates are expected to be hiked by another 25 basis points on 25 January 2011. India's annual inflation rate stood at 8.43 percent in December 2010. Expectations of hardened interest rates have also generated negative stock market sentiments. Price decontrol will make the petroleum industry more attractive for private entrants, as profit margin of firms will get augmented - it will also help to trim the government budget deficit by lowering the subsidy burden.

Critiques point out that, the government is comfortably bypassing the fact that around 30 percent of our crude oil requirements is sourced internally at substantially lower domestic prices and for the rest of the crude (being imported), despite a hike in international per barrel prices, exchange rate dynamics ought to be taken into consideration also -a strong rupee makes imports cheaper. The Rupee is expected to remain strong during January 2011 in view of the steady foreign fund inflows, though the increased demand for USD due to the rising international crude oil prices is set to dampen the rupee to some extent.

Conclusion
On a global scale, countries have experimented with various options for mitigating high oil prices and controlling oil price volatility like rationing, energy conservation, diversification (shifting from petrol and diesel to bio-fuels and natural gas), building up of strategic petroleum reserves, hedging, obtaining cash assistance and discounts from net oil exporting countries and price stabilisation funds, with varying degrees of success.

The problem for the common man is that a fuel price hike pushes up the cost base of the economy and fossil fuel is something, which till date precludes any substantial substitution possibilities. In India the Indian Oil Corporation (IOC) is reportedly considering future options in bio-fuels and ethanol blending technologies as a likely solution to the problem of growing prices of petroleum products.

Those in favour of market linked petroleum prices argue that, any form of government intervention should be done away with, as not only do artificially administered prices create huge subsidy burden for the government, it also blocks the true price signals by making the commodity artificially cheap -heightened demand is stoked in an already undersupplied market. It also promotes illegal transfer of fuel to neighboring countries for arbitrage.
Analysts predict that if India like the US can tap the ‘shale gas' option, it may well open the door for a new and cheap energy resource. Until then, rising lending rates, disgruntled politicians and spiraling inflation seem to be the order of the day for India!