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Free pricing for oil PSUs

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To offset future rise in crude oil price beyond $75 a barrel

Slick move
Prices would be rolled back if global price falls

New Delhi , June 7

Ushering in a free pricing mechanism, the Government will allow state-owned oil marketing companies (OMCs) to fix their own prices for the four petroleum products — petrol, diesel, kerosene and liquefied petroleum gas (LPG) — if international crude oil prices rise above $75 a barrel. According to highly placed official sources, "beyond $75 a barrel crude prices, OMCs will be allowed to revise the prices of the four products on periodical basis in response to the fluctuations in international prices."

The official also said that the periodicity of the revision had not been decided yet.

"We have to see if it could be one month or a quarter," he stated. Explaining how the mechanism would work, he said that if the crude price rises above $75 a barrel on an average for the four petroleum products, prices would be increased; however, on falling, the prices would be rolled back.

The Union Cabinet is understood to have taken a decision to this effect on Monday while deliberating on an integrated package to protect the bleeding OMCs from the impact of high international crude prices.

The package included a price hike on petrol and diesel by Rs 4 and Rs 2 respectively.

According to sources, OMCs would be allowed to adjust the fuel prices autonomously. Asked how this mechanism was different from the one adopted by the NDA regime, the source said that the OMCs will not be required to come to the nodal ministry for approvals for price revision.

Under the NDA rule, for a short while, oil PSUs could review fuel prices every fortnight in line with the global trend.

The Government's decision on Monday in effect means that the subsidy would remain frozen at the current level.

The source said that the latest increase in auto fuel prices along with a fiscal package for oil companies has been worked out at global crude oil price at $71 a barrel.

For every dollar increase in global crude oil prices, retail price of petrol per retail must be increased by 39 paise, diesel 30 paise, kerosene 36 paise and cooking gas by 67 paise.

The source said that the Rs 28,000 crore oil bonds would be issued in four quarterly instalments. The first instalment of Rs 6,500-Rs 7,000 crore is expected by the end of the first quarter, with a coupon rate of around 7.5 per cent. This time the tenure will be 5 years and 7 years, he added.

The Petroleum Ministry is reportedly likely to discuss the oil bonds issue with the Finance Ministry next week.

No rollback

Meanwhile, the Petroleum Secretary, Mr M.S. Srinivasan told reporters, "The Government has clearly explained that there will be no rollback. Price increase has been very marginal and long overdue.

The consumers have been burdened with only 16 per cent of the impact arising from spurt in international oil prices. The remaining 84 per cent is being borne by the Government through issue of oil bonds worth Rs 28,000 crore and by the upstream oil companies."

He said that the Petroleum Minister, Mr Murli Deora has written to the State Governments to cut sales tax as increased retail prices would give them an additional Rs 2,000 crore in revenues. The Centre was not expecting any increase in customs revenue as volumes are unlikely to grow this fiscal, the Petroleum Secretary said.

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