Diesel car frenzy may cool off with price hike

The insatiable appetite for diesel cars may cool off in the coming months, with the setting in motion of fuel pricing initiatives that will bridge the gap with petrol.

At present, the price differential is around Rs 30/litre, spawning a frenzied buying of diesel cars over the last few months. The Government is now likely to hike diesel prices by Rs 3/litre shortly while petrol will get cheaper by nearly Rs 4. The net result is that the gap between the two fuels will now be a tad over Rs 20/litre. “Doubtless, this still makes diesel the more affordable option but will leave petrol less alienated,” industry sources said.

Relief for carmakers

Global crude and product prices have been falling for some weeks and this has been the best piece of news for the oil companies burdened by the subsidy levy. Losses on diesel are a little over Rs 12/litre which will be down to Rs 9 once the price hike is effected. This may reduce even more if global prices cool off further in the coming months.

The concern, though, is the weakening rupee, which could offset the benefits from falling crude prices. However, observers believe this is only an aberration and that it is just a matter of time before the rupee makes up lost ground.

From the carmakers’ point of view, any move that props up demand for petrol cars is welcome news. Some of them have been saddled with huge stocks for many weeks now and are finding it difficult to sell them, thanks to the overwhelming preference for diesel cars. “We hope some sanity will now prevail in the market,” an executive told Business Line .

Companies are also relieved that the Government will not revisit the issue of a levy on diesel cars which had them extremely worried. It is now getting clear that a price hike is being seen as the more viable alternative.

The rapid fall in crude prices to under $90/barrel is the best thing that has happened in recent times. Till a few months ago, crude was holding firm at over $120/bbl which was resulting in huge losses for the trio of IOC, HPCL and BPCL which retail diesel, cooking gas and kerosene at subsidised prices.

Diesel burden

Diesel has been the biggest burden for the companies and, for the first two months of this fiscal, accounted for nearly two-thirds of their projected losses of over Rs 200,000 crore. The numbers have come down substantially since then, thanks to the global slide in prices.

And while petrol cars will slowly come back on the radar, the oil majors still have to cope with the increasing use of diesel in non-auto applications such as construction equipment, generator sets and agriculture. Recent trends indicate that diesel is replacing furnace oil in plants owing to the price differential. This may gradually stop once the price hike becomes a reality.

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