For how long can oil companies bleed on account of fuel subsidy?

Net losses of Rs 40,000 crore in a single quarter! This is what the trio of IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation have reported for the first quarter of this fiscal.

IOC’s loss alone at Rs 22,450 crore is so staggering that one would not be wrong in thinking that here is a company in need of life support.

This is the price that the three jewels of India’s oil industry have had to pay for selling petrol, diesel, cooking gas and kerosene at huge subsidies. And to think that these are listed companies which are operating on the whims of their majority shareholder and owner, the Government of India.

What then is the way out? It is a no-brainer that hiking fuel prices is top priority to ensure the survival of these three oil majors. IOC, HPCL and BPCL should not go the Air India way and become financially crippled entities.

Their combined borrowings are already inching towards the Rs 1,50,000-crore mark, which is a guaranteed recipe for doom.

These companies have no option but to continue some big-ticket investment programmes estimated to be over Rs 2,00,000 crore over the next four years.

Hike fuel prices

Their precarious financial state has also affected companies such as ONGC, Oil India and Gail (India) which are obligated to sell them crude and petro-products at a discount.

This business model is part of the subsidy-sharing mechanism where the upstream sector chips in with a third of the losses incurred by IOC, BPCL and HPCL.

It is also getting increasingly apparent that this is not a sacrosanct formula.

Last fiscal saw ONGC and Oil India dole out nearly 40 per cent of the overall compensation which irked their investors no end.

Given this complex tangle, there is really no other option but to hike fuel prices immediately except that the Government does not seem to have a clue on how to kick off the exercise.

Diesel, in particular, is a worry since its applications are so diversified and go beyond the transport sector.

The whole world knows by now that the oil majors are losing well over Rs 10 per litre on the fuel which, in turn, accounts for nearly 60 per cent of their net under-recoveries.

However, hiking its price is not going to be an easy task. The country is already facing a double whammy in the form of a drought and power crisis.

Diesel is being increasingly used to power generator sets across farms and a price hike at this point will be the last straw on the camel’s back.

Thanks to this impasse, auto buyers are making the most of subsidised diesel with practically no takers for petrol cars. The oil companies can only watch helplessly as diesel losses soar by the day and burn a huge hole in their balance sheets.

In gentle doses

What then is the best way out? If the experience with petrol (pricing) is any indication, the Government may just end up being in denial and sit on the issue for months before announcing a mega shock.

The Uttar Pradesh elections were a good reason not to touch petrol prices for months even while the oil companies were bleeding badly.

The moment this big event was out of the way, came the whopper price hike of Rs 7.50/lt. And to think that, at least on paper, oil companies have the right to revise petrol prices which have been deregulated since June 2010!

Don’t be surprised, therefore, if the same arbitrary process is followed for diesel. It is more than likely that nothing will happen for months before prices are hiked abruptly by Rs 5/lt.

This will be followed by the usual protests and bandhs before a partial rollback is announced. This will, therefore, end up being an exercise in futility.

The best bet for the Government now is to soften the blow and implement a price hike in phases.

Hence, an increase of Rs 5/lt (or more) in diesel can be spread out across the fiscal which will help both the oil companies and end-users.

Likewise, this can be extended to cooking gas where a hike of Rs 50-75 (for a domestic LPG cylinder) is the best way forward.

Fuel pricing is not the simplest of issues to tackle but it is high time the Government gets a little more proactive here.

For years now, various expert committees have voted for complete deregulation but nobody expected crude prices to cross the $100/barrel mark and stay put at these levels.

Price hikes will, therefore, have to be done in gentle doses while making it clear that subsidies are not here to stay.

Stop guessing game

There is no reason for wealthy owners of cars and SUVs to continue using cheap diesel. In all fairness, the automobile industry would rather that its price be deregulated but the Government’s stance on the issue is of little help.

If the best option is to tax diesel cars, so be it. But don’t continue playing this guessing game because carmakers need to plan their production mix of petrol and diesel cars.

None of them anticipated this huge diesel wave and were hard-pressed to meet delivery schedules. And those who only had petrol options to offer were left biting the dust.

Bridging the gap between petrol and diesel prices will help keep this lopsided consumption pattern in check.

At present, the differential is over Rs 25/lt but as diesel gets gradually dearer, petrol cars may start making a comeback, which is good for everyone concerned.

One must appreciate the fact that fuel is a precious commodity which does not come in cheap. Just because it is so heavily subsidised does not give anyone the right to think that it can be exploited forever.

It is a common sight to see people use their cars even for short distances of less than a kilometre.

They do this because they know very well that the Government does not have the gumption to increase prices. It is this smugness that must be kept in check.

(This article was published on August 10, 2012)
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