Tricky issues in fuel pricing

Did politics or economics prevail when it came to Wednesday's reduction in petrol prices?
There could be endless debates on the subject, and the truth is possibly somewhere in between. The reality is that global prices of petrol have been softening of late and there is a strong likelihood of the fuel getting even cheaper in the coming months, unless the rupee plays spoilsport.
From the viewpoint of politics, experts believe that the Government will pull out all the stops to ensure that petrol prices stay in check, especially when the Uttar Pradesh assembly polls are around the corner.

Either way, it is the oil companies which continue to bear the brunt of a lopsided pricing policy.
Logically, they are the ones to decide petrol pricing, given that it is now out of the administered pricing mechanism. Yet, it is no secret that the Government has a say when it comes to any price revision by virtue of the fact that it is the largest shareholder in IOC, BPCL and HPCL.
The fact that they are listed companies with capable managers becomes inconsequential when it comes to tricky decisions such as pricing.
Oil companies are in favour of a stiff tax on diesel cars, which account for 15 per cent of diesel consumption.Likewise, losses on diesel, cooking gas and kerosene are mounting by the day, which has led to the oil majors' combined borrowings touching a mind-boggling Rs 130,000 crore.
This has pretty much been the case for some years now, even while various Government committees have suggested a slew of changes in the present fuel pricing structure. None of this is likely to be implemented in a hurry, especially when inflation is spinning out of control.
The oil companies have generally been mute spectators all this while, and it was, therefore, surprising to see the CEOs of IOC and HPCL uncharacteristically blunt in recent press meets. They dwelt on the dangers of excessive borrowings and curtailing of fuel supplies if the situation got out of hand. All this happened soon after last fortnight's petrol price hike, when political protests got louder by the minute. The companies possibly realised that they had had enough of being everyone's scapegoats and decided to give their side of the story.
The hollowness of these political protests became evident when nobody made a mention of the fact that sales of petrol and diesel are among the largest revenue streams for the States. Price hikes only help further this cause. The political representatives of the States, however, continued to insist that the oil majors should roll back petrol prices instead.
Strangely enough, there are a whole lot of people who still believe that these companies have enough and more cash at their disposal and have no business going in for fuel price hikes. “If this is true, why should we constantly borrow at such high interest rates? Surely, we know our business better than what some others give us credit for,” an exasperated oil sector executive told me recently.

He went on to say that the threat of supplies being disrupted could just end up being a reality if the present state of affairs continued. “When everyone was going hammer and tongs at us for the price hike, nobody spoke of petrol being sold at more than Rs 250 per litre in the Manipur blockade. This could well happen in some other parts of the country if companies go flat broke,” he added.
The Manipur saga clearly shows that fuel supply disruptions can hurt much more than price hikes. During 2008-09, when global crude prices had spiralled to $147 per barrel, oil companies in India briefly contemplated on capping LPG cylinder supplies till the Government stepped in and vetoed the proposal.
At that point, the oil sector believed this was the worst crisis ever, but this year and next could be even more trying for them. For one thing, crude prices are going to stay in the $100/bbl range for sometime to come, quite unlike 2008-09, when they fell dramatically in the latter half of the year to $40/bbl. The resurgence since then has been steady and even the diehard optimist admits that to hope for under $90/bbl is a pipedream.
The other area of concern is diesel losses, which again are gradually on the rise to the extent that IOC, HPCL and BPCL are losing more than Rs 10/litre daily on the fuel. It is a no-brainer that the Government will not even dream of a price hike at this point, given diesel's potential to stoke inflation. The oil companies believe the only way out is to impose a stiff tax on all diesel cars, which are accounting for 15 per cent of its consumption. The auto sector is, of course, bitterly opposed to the move, but this is the only way out to raise more revenue and use it to compensate the cash-strapped refiners.

Even with a stiffer tax on diesel cars, it is unlikely that demand will collapse overnight. Petrol prices have been constantly hiked since June 2010, but this has not impacted its consumption pattern. Likewise, a customer who pays more than Rs 5 lakh for a diesel car will not mind coughing up 10 per cent more if the fuel continues to be considerably cheaper than petrol.
Given that the Government wants to keep its cash compensation to the refiners in check, the levy on diesel cars is the only way out to make good their losses. The timing and the quantum is, of course, a bigger challenge, especially when car sales are slowing down and an added tax will only puncture buying sentiment even further.
There will be some cause for cheer, though, if petrol prices continue their downward trajectory for the rest of the fiscal. The huge price differential vis-à-vis diesel (more than Rs 25/litre) has been a dampener to carmakers like Honda, whose business plan revolves around petrol. Even for those with diesel engine options, it is not a comfortable situation dealing with a lopsided production mix.
The oil companies believe that if the script goes according to plan, the difference between petrol and diesel could be down to Rs 20/litre in the coming months. “It is also an important reminder to people that deregulation does not immediately translate into high prices. They stand to gain when global prices fall too,” an official said.