The Indian Economy Blog

January 5, 2008

Oil Pricing in India

Filed under: Energy,Growth,Politics,Regulatory reforms — Pragmatic @ 10:20 pm

The crude oil prices have finally touched $100 per barrel – a psychological barrier and a statistical inanity. The composition of Indian crude basket represents average of Oman & Dubai for sour grades and Brent (dated) for sweet grade in the ratio of 59.8:40.2 since April 2006. The Indian crude basket has touched a high of over $92 in the new year, but is yet to hit the three-figure mark.

India imports about 76 per cent of its crude oil requirements which amounts to an oil import bill of around $50 billion every year. India’s crude oil import bill rose by 3.48% in rupee terms and 16.67% in dollar terms during the first half of the current fiscal year. The appreciation in rupee value by 12.3% this year, the most since at least 1974, has helped partially offset the sharp rise in global oil prices. As per the Government, every one rupee appreciation in the exchange rate of Indian rupee against US dollar will help reduction in the net oil import bill by around Rs 3950 crore. It should help that the rupee is forecast to advance 3.4 percent next year to 38 per dollar by the end of December, according to the median estimate of 22 strategists surveyed by Bloomberg News.

CNBC-TV18 believes that at current rates, petroleum has an under recovery of nearly Rs 9.5 per litre, diesel Rs 11.3 per litre, LPG Rs 380 per cylinder, and kerosene Rs 21 per litre. However, Indian Express estimates the loss to marketing companies for petrol at Rs 8.74 a litre, diesel at Rs 9.92 per litre, kerosene Rs 20.53 a litre and LPG at Rs 256.35 per cylinder.

As per the government policy of 2003, the subsidy component by the government has remained constant since 2004-05 at Rs 22.58 per per LPG cylinder and Rs 0.82 per litre of kerosene. The balance subsidy is provided by the marketing companies from their own pockets.

The gross under-recoveries in 2006-07 by the three oil marketing companies – IOC, BPC and HPC – were Rs 28584 crore for kerosene and LPG, and Rs 20803 crore for petrol and diesel. The estimated under recoveries by oil marketing companies during April- September 2007 have been Rs13814 crores on kerosene and LPG, and Rs 12549 crore on petrol and diesel. If current price trends hold, the under-recoveries to the marketing companies are estimated to be around Rs 70,000 crore this financial year — around o.75% of India’s GDP. This has to be shared between the three marketing companies, the upstream companies – ONGC, Oil India and GAIL – and the government. The upstream oil companies have already contributed Rs 8788 crore for the period April- September 2007 to partially compensate these under-recoveries by the oil marketing companies. The contribution by the upstream companies in 2006-07 was Rs 20507 crore and is likely to rise by another 5000 crore this year.

In 2006-07, the government issued oil bonds worth Rs 24,121 crore to marketing companies for the four products, while it had issued oil bonds worth Rs.11,500 crore in 2005-06 for losses in marketing LPG and kerosene. The government has decided to issue bonds worth Rs 23,457 crores this year, which is not likely to meet the estimated deficits of the marketing companies.

If additional bonds are not issued by the government this year, the deficit can only be met by increasing the domestic prices of the products. The last time the domestic prices of petrol and diesel were raised was in June 2006. The prices of petrol and diesel were revised downwards twice afterwards, in November 2006 and in February 2007.

Domestic pricing continues to be a politically sensitive topic, with a broad consensus across the political spectrum to stall any upward revision of prices. There is a Group of ministers, chaired by Pranab Mukherjee, to suggest an alternative model for pricing of domestic products. As with the Indo-US nuclear deal, the left and the right are both opposed to any hike in prices of domestic petroleum products. The government is also worried about the inflationary impact of higher domestic prices of petroleum products. A cut in the customs duty on the crude oil and in the excise duty in petrol and diesel by the government is likely to keep the prices suppressed for some more time.

The subsidies, whether direct and transparent by the government or indirect as in tax cuts, oil bonds and compensation by government owned upstream companies, are a drain on the resources of the government. The losses to the exchequer can only be reduced when the consumer pays the right price for the product.

Note – Reuters has an interesting factbox summarising the oil subsidies by various Asian countries, including India and China.

26 Comments »

  1. [...] Cross-posted at the Indian Economy Blog [...]

    Pingback by Pragmatic Euphony » Blog Archive » Oil pricing in India — January 5, 2008 @ 10:22 pm

  2. Chidambaram prods banks to cut rates 0.5%

    NEW DELHI: Finance minister P Chidambaram on Friday said he hoped banks would cut lending and deposit rates by 50 basis points to spur investment and consumption to boost growth….

    ……He asked banks to step up lending, particularly in the consumer durable and non-durable segments. “I have asked banks to increase lending to investors and consumers of consumer durables and non-consumer durables as there is sluggishness in these two sectors,” Mr Chidambaram said…..

    http://economictimes.indiatimes.com/News/News_By_Industry/Banking_Finance_/Chidambaram_prods_banks_to_cut_rates_05/articleshow/2676088.cms

    Is anything going wrong? Anybody care to comment?

    Comment by HmmBut — January 6, 2008 @ 5:52 am

  3. Consider whats going on in the rest of the world, and then combine it with the tight monetary stance the RBI has taken recently. If the global markets become risk averse at a time when interest rates in India are very high, it could spell disaster for the economy.

    Or perhaps its all politics. The second half of last year was marked with an appreciating ruppee due to monetary tightening, and large “off-budget” oil subsidies. Both of these have brought inflation from ~6.5% in 1H to 3.5% in 2H. If you’re running for office you know that this is very good for the average Joe. But it has equally been a real b&~(& for industry. Now lets say you are getting close to elections you know you already got Joe on your side, so what do you do about Industry. You can start to cut interest rates which industry loves, and guess what, Joe will be even happier because all of a sudden everything still costs the same except the loan he’s been eyeing for that scooter…And that pesky inflation?, good thing it has a delayed effect and won’t show up until you already have them by the (%**s

    Comment by Patel — January 6, 2008 @ 4:01 pm

  4. Patel, thanks for your analysis. I think that explains well.

    I hope India can decouple from the US economy in time to maintain stable growth.

    Comment by HmmBut — January 6, 2008 @ 8:02 pm

  5. 76% of our oil is imported, this was the case with Brazil. whose oil imports have come down to a mere 15%. what did they do ? Alternate fuels.. Ethanol.. Our auto industry is expanding, this means pressure on oil imports. By Asking the auto giants to provide flexfuels and adopt ethanol Govt can cut costs, provide better income to farmers. Biodiesel is an other alternative..

    Will someone take the initiative ?

    Comment by murali — January 9, 2008 @ 8:17 am

  6. Ethanol, sourced from sugarcane, may provide the country energy security to a degree, but one has to also look at the implications this will have on India’s water resources which are fast depleting.

    Comment by patel — January 9, 2008 @ 8:49 am

  7. I think the petrol subsidy debate is misguided, because of the absence of discussion of taxes. Are Indians paying less for Petrol than we living in the US? I fill my tank at $3.2/gallon (apart from getting 5% cashback with my credicard), approximately Rs.30/liter which is half what an Indian motorist pays in India. Does it mean 76, Chevron and other places where I fill gasoline from are making losses?? Looking at their stock prices doesn’t make me think so. Indian purchase basket of crude is about 8 dollars cheaper per barrel than international price and Indian refineries are more efficient. So, shouldn’t Indian motorist deserve a much lower gas/petrol price than me?

    Basically, Indian governments at various levels tax petrol and gain over Rs.35/liter and at the end they claim they are losing Rs.9/liter due to subsidies. With proper math, it would come to Indian government gaining Rs.25+/liter on petrol, because its bascially Indian government that is taking up the Rs.9 loss per liter. Simple. So, nobody is doing charity in India with petrol. Its just that government has odd tax policies that end up taxing much more than required and in the end share a part of spoils with oil companies.

    For Diesel and LPG, if you factor out the taxes the government breaks even and only on Kerosene the government, loses overall. But, eventually the hope is that more of rural people would be moved to LPG. Kindly take these account when you discuss oil prices in India.

    Comment by Balaji Viswanathan — January 10, 2008 @ 10:02 am

  8. I think the petrol subsidy debate is misguided, because of the absence of discussion of taxes. Are Indians paying less for Petrol than we living in the US? I fill my tank at $3.2/gallon (apart from getting 5% cashback with my credicard), approximately Rs.30/liter which is half what an Indian motorist pays in India. Does it mean 76, Chevron and other places where I fill gasoline from are making losses?? Looking at their stock prices doesn’t make me think so. Indian purchase basket of crude is about 8 dollars cheaper per barrel than international price and Indian refineries are more efficient. So, shouldn’t Indian motorist deserve a much lower gas/petrol price than me?

    Basically, Indian governments at various levels tax petrol and gain over Rs.35/liter and at the end they claim they are losing Rs.9/liter due to subsidies. With proper math, it would come to Indian government gaining Rs.25+/liter on petrol, because its bascially Indian government that is taking up the Rs.9 loss per liter. Simple. So, nobody is doing charity in India with petrol. Its just that government has odd tax policies that end up taxing much more than required and in the end share a part of spoils with oil companies.

    For Diesel and LPG, if you factor out the taxes the government breaks even and only on Kerosene the government, loses overall. But, eventually the hope is that more of rural people would be moved to LPG. Kindly take these account when you discuss oil prices in India.

    Comment by APJ — January 10, 2008 @ 10:03 am

  9. I do not understand the rational of having both subsidies and High taxes on the same product!! Does the Government feel that by adding to the complexity it is somehow increasing the efficiency of the Oil business. Why does the Government insist on spending money ( on or off Budget).

    If there is so much concern about Oil prices and the inflationary pressures that it exerts why doesnt the Government lower the taxes. The Net effect is the same.

    I feel this is a very clever way for the Government to indirectly fund the State Governments. Due to the Fiscal Responsibility Act they are restricted in bailing out the mostly bankrupt state Governments. So this highly inefficient indirect path is used.

    Further the Stand taken by the “Pro People/poor” politicians is incorrect as i feel that the poor benefit the least from lower oil prices. Inflation will definitely hit the poor people of this country but if the money saved ( by allowing market pricing) can be better utilized in creating the vast infrastructure that this country corely needs. And I’m sure that everybody will agree that the poor will benefit the most from better infrastructure.

    Comment by Tushar — January 10, 2008 @ 5:23 pm

  10. well the petrol prices are rising in india and also the crude oil prices over the world are rising. but the government has too much tax imposed on the petroleum production. it is wat is adding to the bills of common man. i think the prices can be moderated by reducing the taxes a wee bit. we should also look for alternative sources possibly much cleaner ones

    Comment by rambhai — January 10, 2008 @ 8:06 pm

  11. I think what indian government is tring to do by imposing heavy tax is to dissude people to travel more by their personal Cars or bike and want then to use public transport. what i is that think insted of levying hevy tax on oils government should impose taxes on roads and parking spaces as what they do have in west. Government can also impose anual tax on Cars and bikes insted on one time tax. This will encourage people to use Public transport. Morever mony generated can be used to improve the health of our public transport system..
    Whats your opininon on this?

    Comment by Rohan — January 14, 2008 @ 1:20 pm

  12. Can any one tell me how to find the petrol retail price in brazil?

    Comment by resarch for fun — January 16, 2008 @ 4:39 pm

  13. There is one more side of Oil Subsidies.Government has started issuing bonds to Oil companies instead of paying them in Cash,this apart from forcing them to bear part of subsidies.These Oil Bonds mature in period from 5-10 years.These payments does not reflect in current Fiscal deficit.These will resurface after these bonds will mature and future government will have to redeem it.

    I wonder how will the future govt do that?Again issue bond?

    Another thing being…govt is using same Bond issuing mechanism to pay Fertilizer companies.

    Comment by Abhishek Upadhyay — January 21, 2008 @ 4:01 pm

  14. can any body tell me what are oil bonds? And how these help oil marketing companies?
    E-mail- sumitrgarg@gmail.com

    Comment by Sumitr Nouhria — February 16, 2008 @ 8:47 pm

  15. Oil prices expected to breach USD120 /Bar.
    What mechanism do our psu oil companies and govt. have to hedge their possition?

    Comment by Srinivask — April 28, 2008 @ 10:44 am

  16. Some folks have been nice enough to try to collate petrol/gasoline prices from all over the world at;

    http://www.kshitij.com/research/petrol.shtml

    Last upadate was April 18, 2008.

    Comment by Nikhil Nayak — May 1, 2008 @ 10:50 am

  17. Considering the level of taxes on petroleum products the cost of fuel in India is more expensive than the cost of fuel in US. The money collected as taxes is recycled back to the oil companies..

    As per the indian govt the oil marketing companies are guaranteed a 16% return on capital (16% is my assumption ) so the losses are but notional losses.. and actually the person on the street is paying more for oil in India..

    It is good to keep the price of oil artificially high as making the indian economy addicted to oil would be a disaster.. at the same time giving the individual a sense that the govt is subsidizing the petrol & diesel price helps maintain the stability..

    OIL companies are great investments just look at HPCL
    Sales=89,725Cr (March 2007)
    Current Market Cap=7,957Cr
    CMP=234
    Average divident for last 5 years 150% = 15/=
    Divident is 6.6% for CMP.

    In addition you get
    7909 retail outlets
    42 LPG Bottling plants
    13 Aviation service utilities
    Refining capacity of 16.6MT

    No wonder 13% of share holding by FII
    ONLY 6.88% by individuals
    5.6% by mutual funds..

    I think the indian Oil marketing companies are very cheap and are guaranteed by the Govt.. you will also get chance every year or so to sell out at good valuations..
    HPCL 52 Week High/low numbers are 405/208

    =Happy Investing

    Comment by WhatsUp — May 14, 2008 @ 9:48 am

  18. [...] Earlier post on the subject: Oil Pricing in India [...]

    Pingback by The Indian Economy Blog » Upsetting Oil Pricing Conundrum — June 3, 2008 @ 11:31 pm

  19. [...] Earlier post on the subject: Oil Pricing in India [...]

    Pingback by Pragmatic Euphony » Blog Archive » Upsetting oil pricing conundrum — June 3, 2008 @ 11:32 pm

  20. its true that oil companies are suffering great amount of losses due to subsidy given by govt. on petrol and related products.
    if these companies are in loss for previous many years then how r they working?
    who is funding them?
    from where the money for research comes
    they can’t just depend upon the bonds
    they surely might have profitable margin, which is never disclosed.
    i just wanted to know i m correct or not.

    Comment by mohit — June 7, 2008 @ 6:26 pm

  21. We are losing quite a chunk of our tax money in the form of subsidies which are taken advantage by unscruplous people and the oil companies making heft profits. The price of petrol should be increased and the price of diesel and cooking gas should be cross subsidised. This will help to reduce traffic, food price and better use of the tax money

    Comment by Arun — June 8, 2008 @ 5:52 pm

  22. This is what the Nehruvians had always feared in the disgust towards crass westernization. We did not have a ‘liberal’ auto policy and had only an ambassador and fiat all till the early 80s. There was a reason that a nation like ours did not have an auto addition policy. Thanks to the world bank probes installed (google for them) in the govt you now have the economy heading towards ruins – just like their western counterparts.

    Even during the oil crisis there was prudence in our policy when we had reduced consumption. All solutions towards moving the cost from peter to paul will only result in failures. The only solution is to reduce the usage of all automobiles except for public and emergency purposes.

    Road is a privilege and all mileage on all automobiles should be taxed at the highest. This will result in efficient public transport utilization, reduced unwanted travel and abuse of oil – an essential commodity.

    Burning oil is a carbon tax on the front and back. It should be tackled in both directions. Govt rationing of oil would be a good start.

    This will also lead to healthier lifestyles where more people will start using bicycles and walk for shorter distances.

    this a social and cultural problem and lacks any economic solution

    Comment by goldwinner — June 9, 2008 @ 3:12 am

  23. Goldwinner — I presume you’re being sarcastic? Sometimes I tend to be a tad dense about these things

    Comment by Ashok — June 9, 2008 @ 7:24 am

  24. Isn’t it ironic that the Communists in West Bengal are protesting this increase in fuel prices;
    they are also preventing the Govt from signing the nuclear deal with the US.

    They obviously don’t make the connection – nuclear energy is the only way to get long-term reliable energy. If you have issues with the deal as negotiated, negotiate further!

    And this is not the end of the increase in fuel prices, this is ONLY THE BEGINNING!

    It is not a matter of “IF” India will sign the nuclear deal, but WHEN.

    Welcome to Globalization, CPI.

    Comment by Arun Shanbhag — June 9, 2008 @ 8:42 pm

  25. we used to get the fuel 20$ per barrel in 1994, and it reaches now 140$ per barrel.. most of all the governments either Congress or the BJP used to get the income constantly only on fuel products.. like this
    they add 1.Octroi +
    2.excise +
    3.addl exsice +
    4.sales tax +
    5.surcharge +
    6.dealer commission this all will raise the price 59% on the real price,
    say if u r getting petrole at 50Rs. the charges were included 28.50 and the petrole at 21.50 if u calculate in reverse it will show u as 140% of taxes.. so Govt ultimately making huge profits, where the common public suffering from inflation..

    hats off to indian govt. policy….

    Comment by krishna redd y — July 16, 2008 @ 1:42 pm

  26. hi….
    it seems intresting discussion is on …

    can anyone help me get the figures abt petrol nd diesel like…

    what is the % of subsidy given by govt. , what is the sales tax collected by govt. (% as well as figures nd also the subsidy nd sales tax collected by other main countries

    plz atleast provide me some link …

    thanks in advance….

    ….

    Comment by tanweer — July 28, 2008 @ 6:00 pm

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