The Hindu : National : Government may try to avoid oil price hike

Online edition of India's National Newspaper
Wednesday, Aug 11, 2004

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National

Government may try to avoid oil price hike

By Our Special Correspondent

NEW DELHI, AUG. 10. With global crude oil prices continuing to climb and domestic inflation rising, the Government is likely to look for options to avoid a hike in prices of petrol and diesel by mid-August. As things stand, oil companies are set to raise petrol and diesel prices by around Re. 1 a litre during the fortnightly review.

Even this level of increase is not sufficient, industry sources say since the price band will be breached in the case of both petrol and diesel this fortnight. The upper end of the band had been crossed only in the case of diesel when prices were last raised on July 31 but now this will happen in the case of petrol as well.

No option

The sources point out that there is no option since world prices have shot up over the last fortnight. In fact, they feel the existing band system does not give enough weightage to last fortnight's prices and the level of price rise allowed is extremely low in comparison to the need of oil companies. The industry sources are not prepared to accept the argument, however, that with refining margins ranging around $6 to $7 a barrel, the oil companies are raking in enough profits to offset the losses on retail selling prices of petrol and diesel. They say that this is possible only for companies which have refineries as well as a marketing network but IBP which is purely a marketing company is running into heavy losses.

In fact, they say the oil companies are incurring a loss of Rs. 1.20 a litre on the retail selling price of diesel despite the price increase of Rs. 1.42 a litre announced on July 31. At that time, the price band had not been exceeded in the case of petrol, but oil companies say that it will now be breached in the case of this product as well. This follows the rise in world gasoline prices to $49 a barrel over the last fortnight from $45.35 a barrel during April-July. Similarly, world diesel have risen to $47 a barrel in the last week as against $40 a barrel between April and July.

Excise duty

Industry sources who are trying to explain the rationale for their demand for higher prices say the oil companies have already asked the Government to cut excise duty on petrol and diesel to ensure that the sharp volatility in world prices is moderated. Under the existing price band scheme, they are allowed to fix prices within a band decided upon according to a specific formula. The formula includes the average of the landed price of the fuel during the previous quarter and the average landed price in the past one year.

They are also perturbed over the fact that the Government has not given any response to their pleas for a reduction in excise duties as well as on the need for a price hike beyond the existing band formula.

The Petroleum Minister, Mani Shankar Aiyar, has written to the Finance Minister, P. Chidambaram, on cutting excise and customs duty but only for domestic cooking gas and kerosene.

In the case of petrol and diesel, he has suggested levy of fixed or specific duties rather than the existing ad valorem taxes.

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