Financial Daily from THE HINDU group of publications
Tuesday, May 31, 2005
Oil price hike Government must pump up courage
The oil price rise issue is a symptom of this problem. A decision is being deferred as too many reformist signals the other, for instance, is the decision to divest 10 government stake in the profit-making navratna, Bharat Heavy Electricals Limited are likely to draw the ire of the Left parties supporting the Government from outside.
Nevertheless, there are reports that the Government would resolve the oil price riddle before long as a meeting is slated this week to sort out the differences among the Ministries of Petroleum and Natural Gas, Finance, and Commerce to compensate the oil distribution companies for the continuous hammering they had to bear in not adjusting the retail price of fuel to the import-parity price.
A one-year report card of the UPA Government prepared by the Ministry of Petroleum and Natural Gas claimed that though it had decided to wind up the subsidy on kerosene and LPG in a phased manner over three to five years, the Government now plans to continue the subsidy for five years for PDS (public distribution system) kerosene and domestic LPG. Besides the outgo on such subsidies, the public sector oil marketing companies have been sharing the burden by not passing on to the consumers the full increase in global prices.
Thus, the price of PDS kerosene has not been raised since April 2002; diesel and LPG prices have remained frozen since the midnight of November 4-5, 2004 and petrol prices since November 14-15, 2004, even as international crude prices went on a roller-coaster ride, breaching the $50-per-barrel mark briefly and are hovering now at $45-48. The Indian basket of crude oil touched an all-time high of $52.83 per barrel on April 4, 2005 compared to an average price of $27.96 per barrel in 2003-04 and $39.21 per barrel in 2004-05.
It is well known that the subsidy burden extracts a severe toll on the public sector integrated downstream oil companies such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation that refine and market petroleum products. These companies buy crude either from ONGC or from the global markets at prevailing international prices. But they are not allowed to sell their products at prices marked to market and thus have to sustain substantial losses.
The total under-recoveries on this score by the oil PSUs have zoomed from Rs 9,370 crore in 2003-04 to Rs 19,000 crore in 2004-05. While the Petroleum Ministry reckons this figure could soar to Rs 37,000 crore this fiscal, the oil marketing companies put this at a whopping Rs 50,000 crore.
What these companies gain by way of refining margins of $12.15 per barrel is flared by their compulsion to sell final products kerosene, diesel and LPG at far below market prices. Thus, in 2004-05, IOC incurred a subsidy burden of Rs 67 crore on the sale of petrol, Rs 1,206 crore on diesel, Rs 4,215 crore on domestic LPG and Rs 6,193 crore on PDS kerosene.
Though the public sector OMCs were given a price band mechanism effective from August 1, 2004, giving them the leeway to revise the prices of petrol and diesel within the band, the gyrations and volatility in global crude prices led to the breaching of the ceiling within weeks of the mechanismbeing put in place, so that it had to be kept in abeyance.
Even as the woes of the oil marketing companies have been mounting, there came reports that after intense parleys between the Ministers of Petroleum and Natural Gas, and Finance, it was decided to effect a 12 per cent hike in the price of diesel, or Rs 3.75 per litre, and in petrol by Rs 2.60 a litre last week. But the Left parties cried foul and a high-level meeting, presided over by the Prime Minister, of the administrative Ministries concerned on May 26, again explored the options of compensating oil marketing companies for the subsidy loss they had to bear instead of pushing the case for effecting a reasonable increase in cost to eventual consumers.
No doubt, the direct and indirect impact of any hike in fuel prices needs to be reckoned with, particularly when a majority of people do not get income indexed to cost-push inflation.
It must be noted that the requirement of petroleum products in the country is being met by indigenous refining and, to the limited extent required, through imports.
Even as the country exported petroleum products worth Rs 25,000 crore last year, it is dependent up to 70 per cent on imports for its crude requirements, a figure likely to rise to 85 per cent over the next two decades, with the rising consumption of hydrocarbons and its price escalation abroad, rendering the cost of imports prohibitive. For instance, the import of petroleum, crude oil and lubricants (POL) zoomed close to $30 billion last fiscal, against $21 billion in 2003-04. It is against this bleak backdrop of rising crude prices and dwindling chances of any dramatic oil finds that the Petroleum Minister, Mr Mani Shankar Aiyar, has been putting to best use his highly-honed diplomatic credentials to promote India's oil interest.
ONGC Videsh Ltd (OVL), the wholly-owned subsidiary of ONGC, engaged in oil exploration and production (E&P) activities abroad, as well as other national oil companies such as IOC, OIL and GAIL, have been pursuing the acquisition of equity oil and gas abroad, as well as the overseas acquisition of exploration acreages and production properties.
These national oil companies have participating interests in oil and gas projects in Vietnam, Sudan, Russia, Iraq, Myanmar, Libya, Syria, Australia, Ivory Coast, Qatar and Egypt. OVL, in partnership with other oil PSUs, is "aggressively scouting" for E&P opportunities in such far-flung countries as Venezuela, Cuba, Sierra Leone and Ecuador, besides Kazakhstan, Kuwait, Yemen, Chad, Niger, Nigeria, and Angola.
It is a testimony to the success of OVL that of the 33.98 million tonnes of crude oil and 31.75 billion cubic metre (bcm) of gas that the country produced last year, OVL's share of production from its overseas assets was 3.7 million tonnes of oil and 1.35 bcm of gas.
But, all said and done, a reduction in the import bill would depend on the increased availability of oil and gas from domestic fields. In the absence of any such development, adjustment is the only option for effecting moderation in consumption.
If the authorities are unable to effect any upward revision in product prices, alternatives, such as differential pricing for different consumers, could be explored, particularly when wasteful consumption of fuels by individuals or private industry can be monitored, measured and penalised.
This does not mean demand containment, which will have adverse impact on growth per se of the economy, but effective checks on the profligate use of precious fuels so that productive segments of the economy and the weaker sections are insulated from periodic flare-ups in product prices.
Mr Aiyar, with his flair for `synergy in energy', must perforce espouse the cause of deserving sections of the economy for the differential pricing of energy, particularly when his sector yields substantial revenue to the exchequer by way of the plethora of levies, royalty, cess, excise and Customs duty, sales and tax and corporate tax.
The overall contribution has gone up from Rs 59,943 crore in 1999-00 to Rs 92,445 crore in 2003-04, according to the latest report on Commercial Undertaking of PSUs by the Comptroller and Auditor General of India (CAG).
Eventually, as the Mid-Term Appraisal of the Tenth Plan is reported to have plumped for encouraging private participation by each participant in the oil and gas industry from exploration, production and refining to marketing, the Government should set up a long-pending Petroleum and Natural Gas Regulatory Authority by initiating the legislative work in this regard. This would help depoliticise the pricing issue for the eventual benefit of the economy so that hard decisions can be taken without jettisoning good economics.
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