Calculation of under recoveries lacks transparency: Tulsian

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Fuel price hike: Impact and implications on various sectors

WHAT WILL BE THE POLITICAL IMPACT? Opposition political parties will organise national strikes against and try to block legislation in the next parliament session by seeking support from ruling Congress Party coalition allies. Congress could be hit in major state elections, including West Bengal and Tamil Nadu, in early 2011. But the hikes come months before these votes and voter backlash can be mitigated by using savings fuel price deregulation to boost social spending.

There is also an escape clause. The government has already said it would intervene if crude prices rise sharply. What sharply means is unclear and it could be used politically to justify an new increase in subsidies. WHAT WILL BE THE IMPACT ON INDIA'S RETAIL OIL MARKET? State firms such as Indian Oil Corp , Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd , which control more than 95 per cent of about 40,000 refined fuel pumps operating in India, are likely to lose market share. Reliance Industries Ltd, which operates the world's biggest refining complex at Jamnagar, is expected revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms. Essar Oil is also expanding its retail network.

Indarjit Singh - British parliament's first 'turbaned Sikh' member

'Petrol price hike doesn't hit entire economy'

Subsidizing the fuel will aggravate the fiscal deficit scenario and give rise to inflationary factors that will affect all and not just the actual users, Ranbir Singh Butola, chairman of fuel retail market leader IndianOil Corporation, tells Sanjay Dutta. Was it the right time to raise petrol price when inflation is high and RBI was expected to raise interest rates? Public sector oil marketing companies increase fuel prices only as a last resort. IndianOil alone had taken a Rs 1,129 crore loss on petrol in Q1. The government will not compensate this since it is decontrolled. Petrol price was last raised by Rs 4.17, excluding sales tax, on May 15. At the pump level, this meant an increase of Rs 5 a litre. Even after that we were losing Rs 4.58 a litre. At pump level then, the price was still lower by Rs 5.50.Subsequently, the government reduced customs and excise duties on June 25. This reduced the losses on petrol to a level where we expected to absorb a loss of Rs 8 crore in Q2. In the fortnight before Thursday's price increase, we were taking a 41 paise loss on petrol but we did not raise the price, hoping crude would decline. However, global prices of both crude and gasoline rose to push our loss on petrol up to Rs 2.61 per litre. But rest assured that whenever the international prices slide, we will promptly pass on the benefit to consumers. But won't the increase fuel inflation further? This can best be answered by experts. However, we had looked at the issue in some detail in the past. Experts had told us that the impact of a Rs 3 per litre increase in petrol price is negligible at 0.07%. A similar increase in diesel price may have an impact of about 0.42% on inflation. But it will be a fallacy to look at only these numbers, given the fact that we, as a country, import more than 75% of the crude we consume. If we do not pass the impact of high global prices to consumers, worrying that it will burden them, we will not be conveying the correct picture. The economy has to ultimately bear the burden losses on fuels. Since a large part of such losses is compensated by the government, consumers will any way be affected indirectly by high fiscal deficit and resultant inflationary impacts. that will have to be borne by all. In case of petrol, however, the impact of marketrelated pricing will be limited to borne by direct users, while non-users will be spared. Why don't you increase the price in small doses, say when your losses are at 30-40 paise, instead of waiting till the situation requires a substantial jump? This will also allow you to reduce the price in a given fortnight and make market-pricing more acceptable as it happened during the NDA regime when motor fuels were first decontrolled? In a sense, perhaps, there may be a rationale to revise prices in small numbers against our current practice of bearing the small losses and passing on only big increases to consumers when it becomes totally unbearable. The big increases do look large, but in effect, it means the same. At this moment, however, we are eagerly looking for an opportunity to reduce the prices and wish that the global tightness improves paving way for international prices to slide down and for us to be able to pass on that benefit to the consumers. How does your pump price stack up against rates for crude and petrol in the global market? The Rs 63.70 per litre price before the increase corresponded to $116.68/ barrel of crude; whereas gasoline (petrol) cost

$118/barrel in the international market. If you back-work this at crude's level, the pre-hike price was really set at $103/barrel against the actual price of $106 prevalent in the second fortnight of August. We expected prices to remain at this level or fall further. But crude moved up in the first fortnight of September, averaging $110.69. Similarly, gasoline rose to an average of almost $124. Does Rupee depreciation also spur petrol price hike? The Rupee has depreciated in the last couple of days. However, we do not take a view on day-to-day basis. We also factor the expected scenario in the coming period and therefore balance our decision to increase the prices against a very rigid test -- the intention always is to increase the price only as a last resort. What does the coming days hold for consumers? It is difficult to predict future crude prices. The prices are high because of the situation in Libya and healthy growth of transport fuels consumption in Asia. The daily Libyan production of about 1.6 million barrels is at very small level of, say, 2-3 lakh barrels a day. This has resulted in short-supply of sweet crude and the differential price of such crude has increased significantly. Saudi Arabia and other countries have, of course, augmented their production to bridge the gap but the pressure on sweet crude continues. The average price of Indian basket of crude was $85 a barrel in 2010-11. It is $111.53 in the current year so far, an increase of $26.53. Similarly, the average international petrol price averaged $92.43 per barrel in 2010-11 but has risen to $122.23, a rise of $29.80. The international petrol price has firmed up much more than the corresponding prices largely because of maintenance shutdown of Taiwan refineries and the impact of natural calamity on the refineries in Japan. The situation is likely to improve as the Libyan production comes back, albeit at low levels; but even at low levels, it will still help to reduce the pressure on global prices. Some experts believe that in about 6 months, Libya should be able to restore production. Iraqi production is also likely to go up. All these factors coupled with restarting of Taiwan refineries shall help bring down prices. What are your losses on other fuels and their impact on IndiaOil's profitability? Losses on diesel are Rs 6.05 per litre, kerosene Rs 23.25 and for LPG (cooking gas) Rs 267.00 per cylinder. The total impact of these losses in 2011-12 is likely to be Rs 6,4626 crore for IOC and R 117,381 crore for the industry, based on current prices. This translates into an under recovery of Rs.177 crore per day for IOC and Rs.322 crore per day for the industry. Given that the total losses during the last fiscal 2010-11 were Rs 43,112 crore for IOC and Rs 78,190 crore for the industry, and have now gone up to such high level, the OMCs' financial situation is under great stress. The borrowing levels have risen at all-time high levels. The borrowings of IOC, which were about Rs 53,000 crore as on 31.03.2011 have gone up to Rs 73,274 crore as on date. Such high levels of borrowings translate into very high interest burden. As a result of various factors, including these, IOC incurred a loss of Rs 3,719 crore Q1. The Company is hoping that the situation improves and it is able to register better performance, yet, the challenges are very many.

Oil marketing companies (OMCs) hiked petrol prices by around Rs3 a litre from Friday last week. The increase was triggered chiefly due to two reasons higher global oil prices and the depreciation of the Indian rupee against the US dollar, resulting in higher import cost. According to a statement by the Indian Oil Corp. Ltd (IOC) on 15 September, rupee devaluation and higher international petrol prices led to an increase in petrol under-recovery (loss on selling fuel below market rates) to Rs. 2.61 a litre from Rs. 0.41 a litre on 1 September. IOC further maintains the impact due to exchange rate fluctuation is Rs. 0.48 per litre, due to increase in international prices is Rs. 1.72

per litre and the balance impact of Rs. 0.53 per litre is due to value added tax. This implies a good portion of the current hike is due to higher prices. So what does this mean for OMCs IOC, Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)? If the current price revision hadn t happened, OMCs would be losing Rs. 15 crore each day, said IOC s statement. So, in that sense, this is a positive development for OMCs. But note that petrol is already a deregulated product (though some government intervention is still there) and this development will not affect the so-called under-recoveries of the industry. Brokerages are estimating under-recoveries for this fiscal to be as high as around Rs. 1trillion. That figure is higher than the under-recoveries of the previous two fiscals. However, if crude oil prices and the rupee remain at the same levels, then analysts are likely to revise their under-recoveries estimates upward for this year. Currently, the industry is losing Rs. 263 crore a day on other petroleum products, according to the statement from IOC. This column had earlier talked about the unpredictability of earnings of OMCs, as their profitability depends on how much support they will eventually get from the government and the state-owned upstream oil companies. That is one of the main overhangs for OMCs. Unfortunately, those concerns persist even after this price hike. In the June 2011 quarter, OMCs reported loss at the net level. On the macroeconomic level, this development adds to the already high inflation in the country. This will have a direct impact of 7 basis points to WPI inflation, in addition to indirect impact with a lag, RBI said last week in its mid-quarter Monetary Policy Review: September 2011. One basis point is onehundredth of a percentage point. As things stand now, near-term prospects appear bleak for OMC stocks, thanks to a lack of clarity on the subsidy sharing mechanism. However, from a medium- to long-term perspective, there is a glimmer of hope. The government has announced its intentions to reduce the subsidy burden through initiatives such as putting a cap on the subsidized liquefied petroleum gas (LPG) volumes or cash-based subsidy transfers. Needless to say, the implementation of these plans will be positive for OMCs over a period of time. But implementation is key. We welcome your comments at marktomarket@livemint.com

Oil shock: Petrol price hiked again, this time by Rs 3.14 per litre
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petrol price hike

NEW DELHI: State-run oil companies on Thursday raised the price of petrol by Rs 3.14 per litre, the third substantial increase since January, a move which is expected to stoke inflation and upset household budgets. The decision sparked an immediate protest from UPA partner Trinamool Congress. Party leader Mukul Roy is reported to have conveyed the party`s opposition to the move to finance minister Pranab Mukherjee. Oil companies had last raised petrol price by Rs 5 a litre on May 15. Before that, they had twice revised prices in January by Rs 2.50 a litre. Prices went up marginally due to an increase in dealer margin. Petrol prices vary from city to city depending on VAT and other local levies

Oil companies argue that a fall in the rupee against the US dollar increased their cost of crude, forcing them to raise the price. But some sections in the government as well as analysts are not buying this. They say that the rupee`s movement in recent days does not warrant such a steep hike, especially when inflation is near double digits. Latest data shows inflation, as measured by the wholesale price index, stood at 9.78% in August. It has remained above the 9% mark for nine consecutive months. Oil company executives counter this by saying the present petrol price of Rs 63.70 per litre corresponds to crude price of about $103 per barrel but the mix of crude India buys oil is ruling at $111 per barrel. This difference, coupled with the rupee`s decline, increased their losses. The executives say every Re 1 increase in the dollar exchange rate raises their losses by around Rs 9,000 crore a year. The impact due to the exchange rate is 48 paise and due to increase in international prices is Rs 1.72 per litre. The balance impact of 53 paise is due to VAT. The increase is Rs 3.14 per litre in Delhi.

"We were losing Rs 2.61 per litre or Rs 15 crore per day on sale of petrol. After adding sales tax or VAT, the hike needed to level domestic rates with international prices came to Rs 3.14 per litre in Delhi," an executive said. Economists said the sharp depreciation of the rupee against the US dollar forced the firms to raise prices. "Although it is not going to pressurize overall inflation significantly, it will be a burden on the middle class particularly those who use petrol driven vehicles," said D K Joshi, chief economist at ratings agency Crisil. Petrol accounts for 1.09% in the wholesale price index (WPI) and therefore has a limited impact on overall inflation. Diesel accounts for 4.67% of WPI and any increase in prices impacts inflation significantly. Petrol prices were freed in June last year but the government continues to control diesel and cooking gas prices. Consumers said the increase was unjustified and imposed a fresh burden. "It is becoming unbearable and how can the common man face such sharp increase. It will add to already high expenses," said Deepak Majumdar.

Mumbai: State-run oil firms will raise petrol prices by nearly 5 percent from Friday, a move that eases their subsidy burden but adds near-term pressure to stubbornly high inflation in Asia s third-largest economy. Hindustan Petroleum Corp Ltd, Bharat Petroleum Corp Ltd and Indian Oil Corp, which dominate fuel retailing in India, said they will increase their petrol prices by Rs 3.14 per litre.

Oil storage tanks are seen at the Bharat Petroleum Corporation Ltd refinery in Mumbai. Punit Paranjpe/Reuters The overall inflationary impact of the price increase is expected to be modest, at between 4 and 15 basis points, economists said. Petrol accounts for just 1.09 percent of the wholesale price index , while diesel, which is much more widely used, has a weight of 4.67 percent. Oil companies in India have been free since June 2010 to set their own prices for petrol, which is considered a rich person s fuel. Raising the petrol price is politically easier than lifting state-controlled diesel prices, which New Delhi did in June after months of delay. India has been increasing fuel prices in order to ease its fiscal burden, but doing so is sensitive for Prime Minister Manmohan Singh s ruling Congress party, whose voter base is heavily rural and poor. Singh s government has been on the back foot over persistent inflation as well as a slew of corruption scandals that have weakened its ability to push through reforms. It is never a right time in India for a petrol price hike, and what this shows is the government is prepared to take some unpopular decisions, said political columnist Amulya Ganguli. It has been on the defensive for a long while, and now is realising it cannot sit still and do nothing and must take the economic steps that it must, he said.

Headline inflation in India rose to 9.78 percent for August, data on Wednesday showed, its highest in 13 months, adding to expectations that the Reserve Bank of India (RBI) will raise interest rates on Friday for the 12th time since March 2010. RBI Governor Duvvuri Subbarao has repeatedly called on New Delhi to improve its fiscal position to help manage inflation over the longer term. Nitesh Ranjan, an economist with Union Bank of India, said the inflationary impact of the petrol price increase would be minimal and is positive from the central bank s perspective. In tackling inflation, fiscal policy actions need to be in consonance with the monetary policy, else fiscal deficit will counter the moderating trend in aggregate demand, he said. Considering the government s rhetoric and today s move, odds for a pause in policy rate has increased, Ranjan said. The central bank is widely expected to be nearing the end of its tightening cycle. Indian Oil Corp has lost Rs 1150 crore ($241.4 million) thus far in the fiscal year that began in April on petrol subsidies, Chairman RS Butola told local media. The recent depreciation of the rupee, which has fallen nearly 8 percent from its 2011 high, adds to the subsidy burden for oil marketing companies. With this hike, all the under-recovery associated with petrol ends and one can expect no more hikes in petrol in the near future, said DK Aggarwal, chairman and managing director of SMC Investments and Advisors Ltd. Brent crude oil traded at over $115 a barrel on Thursday, up over $3 buoyed by a rally in European equities. At $89.4 a barrel, Nymex light crude has risen over 18 percent from a 2011 low reached in early August. The petrol price increase to about Rs 66.5 per litre comes after a record Rs 5 hike in May. This hike is a result of Rupee volatility. OMCs need to have a hedging program to offset such pressure. Why should the man on the street pay more if the OMC is still in 80s mode? Does an IT company start charging its customer more if the dollar falls? The Govt said retail price of petrol will be linked to international prices of crude. Then why this hike even though crude prices have come down? The OMCs need to buckle up rather than keep whining as they do.

The Indian infrastructure group will acquire a 79 percent stake in the Alpha and Alpha West coal mines in the Galilee Basin, and will buy Kevin s Corner coal mine and the rail and port project connecting the Investors expect the Federal Reserve to take steps to pull down long-term interest rates when policymakers meet on Tuesday and Wednesday to help revive the persistently weak US economy. Mumbai: The Reserve Bank today said there was a downside risk to 8 per cent growth projection for the current fiscal due to global concerns and slowing domestic demand. The growth momentum is weakening in advanced economies amid heightened concerns that recovery may take longer than expected earlier, RBI said, adding that this combined with [...]

Concerned over high inflation, the Reserve Bank today raised key interest rates by 25 basis points, its 12th such hike since March, 2010, making auto, home and other loans more expensive.