The Hindu : Oil prices may go up after elections

Online edition of India's National Newspaper
Tuesday, Mar 23, 2004

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National

Oil prices may go up after elections

By Sushma Ramachandran

NEW DELHI, MARCH 22. Petrol and diesel prices may be hiked immediately after the elections to match the rise in world oil prices, but oil companies are considering a phased increase to reduce the burden on consumers. Though raising prices has nothing to do with the model code of conduct, the public sector companies have been informally advised by the Petroleum Ministry to hold back on any increases till after the elections. Clearly, the "feel good factor" could be affected by a Rs. 5 a litre hike in petrol and a rise of Rs. 3 a litre of diesel.

Industry sources, however, maintain the increase after the elections need not be as high as five or two rupees a litre for petrol and diesel respectively which is the extent of rise in international prices over the last two months. They say it would not be fair on consumers to effect such a steep hike in prices in one stroke. Instead, the increase could be in phases with an initial hike of about one rupee a litre.

This is despite the fact that the oil industry has to absorb the higher world prices for the time being. The impact on the entire industry is estimated at Rs. 2,500 crores for the last two months. A price review is normally carried out every fortnight taking into account the scenario in the international market. The system has been in force ever since the dismantling of the administered pricing mechanism about two years ago which led to the linkage of diesel and petrol prices with world rates.

Only kerosene and LPG have been left about this system and continue to be priced at subsidised rates. The price revision has not been carried out for the last two months, as a result of which the higher prices are being absorbed by the oil marketing companies notably the Indian Oil Corporation, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited.

Fortunately, the oil companies have the capacity to absorb this additional burden. Informed sources say profits of these companies are not likely to be affected in the current financial year. Profits are expected to remain at the same level as last year largely due to a sharp rise in the refining margins and the compensation given by the Government for subsidising kerosene and LPG under a special scheme.

Refining margins reflect the efficiency in using crude oil and producing the various petroleum products in the marketplace.

Technically, with the withdrawal of the controlled pricing mechanism, the Government has nothing to do with price revisions of petrol and diesel. But in effect, the oil companies take the cue from the Petroleum Ministry which continues to indicate the timing of any upward or downward revision.

The industry may not have much of an option on this issue but at the same time these companies have the financial muscle to sustain such losses in the short run.

In the long term, however, it could have an adverse effect on the oil sector which has displayed its high rating in the stock market after the recent public issues of Oil and Natural Gas Corporation and Gas Authority of India Limited.

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