The Hindu Business Line : Oil on the boil, again

Global crude oil prices are on the boil again, with the benchmark Brent crude nudging the $70-a-barrel mark. Besides the familiar factors such as geopolitics, adverse weather and hedge funds, the major cause for market nervousness is the possibility of supplies drying up from Iran, the fourth largest oil exporter. Stoppage or disruption of 2.5 million barrels of oil a day, which is Iran's contribution to the market, could mean trouble what with the daily demand pegged at 85.1 million barrels. This is especially so because the non-OPEC supplier, Russia, is facing problems in increasing its output and cannot be relied upon to make up for Iran's share. The unrest in Nigeria and the disruption in supplies from that country are adding to the market's jitters. Speculators are, after a brief layoff, back playing on the market's fears. A new factor in the calculus is the approaching hurricane season in the United States. Given the disruption caused by Hurricane Katrina last year, the oil market is building in the hurricane risk in its futures prices — the three-month futures already cover the hurricane season.

All this point to a tough summer ahead for oil consuming countries. And the news is extremely bad for India's oil economy which is already on edge. Marketing companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum — have been complaining about substantial under-recoveries on transportation fuels and the increasingly heavy subsidy burden on kerosene and cooking gas. With the latest run-up in global crude oil prices, their position is only likely to worsen. Unless, of course, the Government gathers the courage to realign domestic fuel prices to the international levels. Elections in four major States all but rule out any immediate increase in retail fuel prices. The agony of the oil companies is, therefore, likely to continue well into 2006-07 first quarter.

From a policy perspective, the Government may soon find itself having to act on the twin issues of taxation of petroleum products and subsidies. The Rangarajan Committee, which submitted its report in February, has recommended changes to the tax structure as also the pricing of petroleum products. The Government has chosen not to act on the report but the latest increase in global prices and the consequent impact on the balance-sheets of the oil companies may force it to do so. Given that taxes, Central and State, account for about 55 per cent of the retail selling price of petrol and 34 per cent of diesel, the pressure will be on the Government to sacrifice a part of its revenues to keep retail prices under check. The scope for adjustment on the other two fronts — increasing retail prices or shifting the burden to the oil companies — is very little at this point in time.