Economy

Dithering on diesel price hike will cost petroleum companies dear

| | Updated on: Apr 02, 2014
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If global crude prices start to harden, firms’ losses on diesel could grow to ₹8 a litre

With no hike in diesel prices this month, oil companies could find themselves on a sticky wicket, going forward.

From the Government’s point of view, there is no need to go in for the mandatory 50 paise increase in diesel prices since retail losses on the fuel have been falling and are now under ₹6 a litre. While the matter has been referred to the Election Commission for approval, it is clear that vote bank politics is at work. This was what prompted the Government recently to increase the cap on subsidised cooking gas cylinders from nine to 12 annually.

In the case of diesel, the Government had decided to go in for marginal price hikes each month, which would eventually wipe out the subsidy. This was seen as a pragmatic option to soften the blow on the end-user and, in the process, pave the way for market-determined pricing.

The monthly hikes of 50 paise were doing the trick in phasing out diesel subsidies without too much of a fuss.

Projected losses It was the best piece of news to the oil marketing trio of Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL), which were, otherwise, losing over ₹10 a litre till a year ago.

Since then, this difference has come down considerably, but still translates into losses of around ₹50,000 crore annually. This, in turn, accounts for nearly 60 per cent of the projected fuel losses that could be incurred by the oil companies this fiscal with the balance taken up by cooking gas and kerosene.

It now remains to be seen what the EC has to say about keeping diesel price hikes on hold. Things may look comfortable now but once global crude prices start to harden, losses on diesel could grow to even ₹8 a litre.

Oil companies are naturally alarmed at the prospect of this happening just when it looked as if a pricing roadmap was finally in place for diesel.

That the fuel it is used in a host of industries also makes it doubly difficult to cope with the subsidy burden. This is what eventually leads to diesel taking up the lion’s share of fuel losses.

Policy continuity At this stage, the top managements in these oil companies can only keep their fingers crossed and hope that the new Government will continue the process of diesel price deregulation.

“If they decide to slam the brakes on further hikes, it is back to square one for us,” a top company official said. With IOC, BPCL and HPCL earmarking over ₹150,000 crore on key investments over the next three years, the last thing they need is to carry an added burden of diesel losses. It would hardly help their cause.

Published on April 02, 2014

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