Everyone knows it is heavily subsidised. Yet, any talk of a price increase in diesel raises the hackles of political parties. And amidst this chaos, expensive cars and SUVs are making the most of a hugely cheap fuel.
Oil companies are losing Rs 15/litre on diesel and are terribly concerned because it is already accounting for over 50 per cent of their projected losses of over Rs 2,00,000 crore this fiscal. Kerosene and cooking gas take up the balance but diesel continues to be the biggest area of concern because its use extends to a host of applications.
The transport sector is only a part of the actual problem. Thanks to the severe power crisis in many States, generator sets have become inevitable and need to be powered by diesel. Furnace oil, used in a variety of industrial applications, has given way to diesel which is a less expensive option.
“Diesel is being used just about everywhere and has got all of us extremely worried,” an oil sector official told
In the automobile sector, petrol has virtually been relegated to the sidelines since it is dearer by a good Rs 25/litre. This differential could increase to Rs 30 if the oil companies have their way and go in for a petrol price hike in the coming weeks. When that happens, use of diesel in cars will literally shoot through the roof.
Automakers reckon that if this trend continues, diesel cars will account for 85 per cent of total sales which is catastrophic news for manufacturers like Honda whose lifeline is petrol.
Logically, the subsidy element on diesel should also be knocked off at one go in order to bridge this yawning gap with petrol but the Government can, at best, contemplate a hike of only Rs 3/litre. Even this will have the Opposition baying for its blood as was evident recently when the subject of diesel price deregulation cropped up.
As long as this inaction continues, use of diesel will continue unabated even as its supplier trio – Indian Oil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation – is bleeding by the hour. It was all very nice for the Government to reiterate after the Budget that it would have to ‘bite the bullet' on fuel pricing but reality is different.
Inflation is hurting households already and the fear is that a diesel price hike will only make things a lot worse. However, this impasse will only see losses piling up for the oil majors and there is no telling when the bubble will burst eventually.
IOC, HPCL and BPCL are already borrowing heavily and the combined figure is already in excess of Rs 1,30,000 crore. Officials of these companies are concerned that this will lead to an ‘Air India-like situation' when banks will simply refuse to lend one day. “When that happens, we are dead and this is something the country just cannot afford at this point,” an oil industry executive said.
By the end of the day, it is the responsibility of the PSU oil marketing companies to ensure fuel supplies across the country. Their private sector counterparts like Reliance Petroleum and Essar Oil have no such obligation simply because they cannot afford to retail petrol or diesel at a subsidy. And even if they choose to, they are not eligible for a compensation mechanism like IOC, BPCL or HPCL. The best bet, therefore, is exports and this has emerged a profitable option for private players.
Clearly, the Government has a tough task on its hands. Its fiscal deficit projection of 5.1 per cent for 2012-13 could just go out of the window if the issue of fuel pricing is not taken up quickly. The oil companies have literally resigned themselves to the fact that nothing radical is likely to happen especially when petrol prices have remained untouched for months.
In June 2010, the Government had proclaimed that petrol would be removed from the administered pricing mechanism. Since then, its price has gone up by over 50 per cent but, of late, amidst stiff political protests, the companies have been asked to put off any further price increases. Little wonder, therefore, that they are sceptical about any revision in diesel prices.
“It is all very nice to maintain the status quo and pretend that nothing is wrong. However, it is only when each of the oil companies begins falling sick and fuel supplies are severely affected will people realise that paying more is a better option,” an oil sector official cautioned. By then, it could just end up being a little too late.
And tough times are here to stay. Global crude prices are already averaging $115 per barrel and show no signs of cooling off. The need of the hour is some tough talking from the Government. There are no indications of this happening for sometime now.