The Hindu Business Line : No oil for troubled waters

Governments in power have for too long brushed under the carpet certain crucial aspects of the oil economy, and have been taking the easy course of tinkering with prices. People must be made to understand that the raising of petroleum product prices, besides stabilising and strengthening the nation’s finances, also helps in conservation and efficient energy use, says B. S. RAGHAVAN.

A committee has been appointed to assess the financial needs of the refiners and OMCs to continue their normal business activities and to meet the energy needs of the economy.

The first thought to occur to a worldly-wise person on the hiking of prices of petrol, diesel and LPG by the Government would be: What else could any government have done when the price of crude has doubled in the past year touching $135 per barrel and gone up by 203 per cent between May 2004 (when the United Progressive Alliance took charge) and March 2008?

Did not the National Democratic Alliance (NDA) Government, when it was in office, raise the prices of petroleum 21 times, diesel 17 times, LPG thrice and kerosene twice when the price of crude increased by only $22.5 from 1998 to 2004?

How else to stop the haemorrhage of Rs 2,45,305 crore in ‘under-recoveries’ suffered by oil marketing companies (OMCs)? How could any responsible Government let them go bankrupt and take the risk of putting the nation’s economy on the skid? Have not Indonesia, Sri Lanka, Taiwan, Bangladesh, Malaysia and the US similarly jacked up prices, some by as much as 30 per cent?

Let us see how the accruals to OMCs add up as per the Government’s calculation: From price increases: Rs 21,123 crore; lowering of Customs, excise and other taxes and duties: Rs 22,660 crore; oil bonds: Rs 94,600 crore. (The Reserve Bank of India reportedly has already begun making purchases of the bonds, thereby relieving the OMCs of their liquidity crunch.)

For the OMCs, the higher prices of oil are not an unmixed curse; they make substantial margins out of them — at least enough to enable them to set apart Rs 65,000 crore as a cushion. The Government hopes that a good part of the presently uncovered gap of Rs 29,000 crore would be made up by buoyancy in revenues during the year.

In the above light, to describe the Government’s decision as ‘economic terrorism’, as the BJP has done, is to indulge in an unwarranted verbal excess. However, the Governments in power have too long brushed under the carpet certain highly crucial aspects of the management of oil economy, and been taking to the easy course of tinkering with the prices to let itself off the financial hook for the nonce, banking on the motto “sufficient unto the day the evil thereof”.

First, the lack of transparency in computing the earnings and outgo of the firms in the oil sector. Surging crude prices have brought in windfall bonanzas to oil companies round the globe.

For instance, according to a write-up, Exxon Mobil, in 2007, beat its own record for the highest profits ever by any company with a net income of $40.6 billion (Rs 1,62,400 crore).

The company’s sales, at more than $404 billion (Rs 16,16,000 crore), exceeded the GDP of 120 countries. Chevron, too, recorded strong profits at $18.7 billion (Rs 74,800 crore).

Windfall profits

As regards India’s three big oil companies, the position as garnered from the material available in Web sites is this. The profit of Indian Oil Corporation from the sale of petroleum products has grown by 52 per cent during April-December 2007 compared to last year.

It makes huge profits from the sale of aviation turbine fuel (ATF) (of which there is never a shortage!), petrochemical products, sale of gas and other related products. As India’s biggest petroleum refiner, its year-on-year rise in its net profit in the third quarter (Oct-Dec) was 16.7 per cent, despite the financial pressure on its bottomline due to the high international price of crude oil.

Bharat Petroleum’s net profit during the same period went up by 13 per cent to Rs 17,987 crore, while Hindustan Petroleum’s stood at Rs 750 crore (against Rs 1,021 crore last year). The gross profits of all the three companies during April-December 2007 were Rs 37,360 crore. If the oil bonds issued by the Government worth Rs 20,332 crore are added to the above profit, then the total income of these companies stands at Rs 57,692 crore.

Similarly, private upstream oil producing companies (unlike Oil and Natural Gas Corporation) and private standalone refineries are making windfall profits in production and refining business as they are charging international prices without any linkage with actual production and refining cost.

The refiners are getting import duty and sales tax exemptions from the Government in India, whereas, by contrast, the US levies a windfall tax on profits of such oil companies.

There has been no attempt so far to analyse the cash flows and the profitability of the OMCs to get a clear picture of the changes taking place in their operating positions, particularly the impact on access to credit and cash availability for their operations.

Only now, along with the latest price hike, has the Prime Minister appointed a committee to go into the above aspects as also to revisit the concept of “under-recoveries” and examine the reported deficit and the real deficit faced by OMCs as a result of price constraints imposed on them.

It will also assess the financial needs of the refiners and OMCs to continue their normal business activities and to meet the energy needs of the economy and the possible sources of funds to meet their financial needs.

If such an exercise had been undertaken periodically over the past 20 years, the country could have been spared all the agonies it had to undergo with each price increase.

Speculation in oil

It must be remembered that every time the crude oil prices moved up in the past, the Central and State Governments made a killing by way of a vaulting rise in revenue. Their earnings from the oil sector were Rs 73,800 crore in 2001-02, Rs 96,751 crore in 2002-03, Rs 104,375 crore in 2003-04, and Rs 164,000 crore in 2007-08.

In addition, more than Rs 7,500 crore is collected every year as cess by the government at the rate of Rs 2,500 per tonne from public sector oil producing companies ONGC and Oil India Ltd. There is no transparency in the accounting and utilising of these revenues as well.

Only a comprehensive and thorough review of the financial profile of the oil sector will throw light on the correct position regarding Rs 2,45,000 crore of ‘under-recoveries’ of OMCs which, to the Left parties, are nothing more than notional losses based on international prices and not the actual loss computed in the balance-sheet.

The second crucial dimension of the oil economy is the difficulty in determining the respective roles of supply and demand factors and speculation in commodity exchanges. In the opinion of the Organisation of Petroleum Exporting Countries (OPEC), speculation and not supply demand considerations are to be blamed for soaring oil prices.

There are many takers to the view that rising prices are due to people moving out of the dollar and into commodities such as crude and that investors see hard commodities such as oil as a hedge against inflation and a weak dollar.

India has been lagging in putting its weight behind its own suggestion to ban oil trading into which hedge funds, banks and pension funds have been pouring in recent years.

Conservation

Finally, there is no need for the Government to bend over backwards to be on the defensive about having to raise prices in consonance with international trends.

Of course, the Government cannot act purely on the basis of logic and arithmetic in a matter that touches the lives and emotions of millions of people, especially in view of the coming elections to some State governments and the looming Lok Sabha elections next year.

Of course, there will be a concomitant rise in the inflation rate, which would further expose the UPA Government to virulent political castigation.

But a government should not shy away from doing what it considers to be its duty in the national interest.

People must be made to understand that the raising of the prices of petroleum products, besides stabilising and strengthening the nation’s finances, also helps in the conservation and efficient usage of energy, as has been demonstrated in the US, Japan and OECD countries.

A little bit of pain in the short run is good for the consumer so that he learns the importance of the Prime Minister’s call to every citizen “to conserve energy at every step, every minute of the day…and reduce wasteful consumption... be it petrol, diesel, kerosene, LPG, electricity or even water”.