As Oil Turmoil Continues, Will ONGC and Oil India Be Asked to Share the Subsidy Burden?
THE WIRE
May 22, 2018
Petrol and diesel prices have shot up by Rs. 2.24 and Rs 2.15 a litre respectively since oil marketing companies (OMCs) resumed daily price revision on May 14.
New Delhi: The potential return of an under-recovery sharing mechanism is currently looming over upstream oil companies as the Modi government moves to calm simmering public anger over rising auto fuel prices.
As petrol and diesel prices hit new highs on Tuesday, media reports, quoting anonymous senior government officials, said that the Centre may come out with “some steps” this week to provide relief to auto fuel consumers.
This unnamed official, however, hinted that the government may not cut excise duty which makes up about a fourth of the final price of petrol and diesel.
“Rising fuel price is a crisis situation for government and it has to be handled with combination of steps. Finance ministry is consulting the petroleum ministry on rising crude prices,” he told PTI.
Petrol and diesel prices have shot up by Rs. 2.24 and Rs 2.15 a litre respectively since oil marketing companies (OMCs) resumed daily price revision on May 14 after a 19-day gap when price revision was put on hold due to Karnataka elections.
Meanwhile, according to Reuters, oil rose towards $80 a barrel on Tuesday in the global market, supported by concern that falling Venezuelan crude output and a potential drop in Iranian exports could further tighten global supply.
Crude is trading at the highest since late 2014, underpinned by a supply-cutting deal among the Organization of the Petroleum Exporting Countries (OPEC) plus Russia and other non-members, and strong global demand.
Brent crude LCOc1, the global benchmark, rose 54 cents to $79.76 a barrel by 1221 GMT. Last week, it topped $80 for the first time since November 2014.
Subsidy sharing
If the government revives the petroleum subsidy sharing mechanism, upstream majors like ONGC and Oil India could see erosion of their profits. But little impact is seen on profits of OMCs.
ONGC and OIL had for more than 13 years paid as much as 40% of the under-recoveries arising from fuel retailers selling petrol, diesel, domestic LPG and kerosene at a government-mandated price, which was way below the cost.
This subsidy sharing ended in June 2015 when global oil prices started falling on concern over global economic slowdown.
The government freed petrol price from its control in June 2010 and diesel in October 2014. It now provides a limited subsidy on LPG and kerosene. Even on LPG, the government from August 2017 stated to hike per cylinder selling price gradually, with a view to finally phase out subsidies.
International credit ratings agency Moody’s has said if ONGC and OIL are obligated to contribute the entire subsidised amount exceeding the government’s budgeted figure for 2018-19 fiscal, it would reduce their net price realisation to $52-56 per barrel. Upstream players reported per barrel net price realisation $56 on crude sales in 2017-18.
Moody’s has estimated that government’s fuel subsidy bill would anywhere between Rs 34,000 crore to Rs 53,000 crore in the current fiscal, the highest since 2014-15, assuming Brent crude oil prices average $60-80 per barrel.
Retail price of petrol, diesel in India and neighbouring countries on May 1, 2018: A comparison
Country Petrol (Rs/litre) Diesel (Rs/litre)
India (Delhi) 74.63 65.93
Pakistan 50.67 57.06
Bangladesh 68.47 51.75
Sri Lanka 49.67 40.33
Nepal (Kathmandu) 66.69 54.73
Source: PPAC
Brent crude is already hovering close to $80.
But the government has budgeted just Rs 25,000 crore for fuel subsidies in 2018-19, which could fall far short of requirement if the current uptrend in the global crude market continues.
The Centre is not in a position to slash excise duty on petrol, diesel due to its weak fiscs. States too have ignored calls for reducing sales or value-added tax on petrol and diesel.
Petrol, diesel remain outside the ambit of Goods and Services Tax (GST), leaving the scope for states to levy tax on auto fuels according to their choice.
Arun Kumar Das reports:
The Congress on Tuesday also made a scathing attack on the Modi government over rising oil prices and demanded reduction in excise duty on fuel in BJP-ruled states while hinting at doing the same in its own ruled state in Punjab to ease the burden on common man.
Taking a dig at the BJP government, Congress spokesperson Pawan Khera asked what business model the government was following with regard to fuel prices since international crude oil was at $107.57 per barrel in May, 2014, which has come down to $79.
However, in the same period, petrol and diesel prices have risen from Rs 71.41 and Rs 55.49 respectively to Rs 76.87 and Rs 68.08 in Delhi.
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