The Hindu : National : Uncertain outlook for oil sector

Online edition of India's National Newspaper
Monday, Jan 31, 2005

National

National

Uncertain outlook for oil sector

By Sushma Ramchandran

NEW DELHI, JAN. 30. The outlook for the country's oil economy appears uncertain in the wake of the Oil and Petroleum Exporting Countries (OPEC) deciding that production cuts are not needed to moderate international oil prices currently hovering around $50 a barrel. With domestic oil companies having kept retail prices down for several months, the Government may soon have to consider allowing them to raise the prices. The only other alternative is to burden the companies with under-recoveries due to low retail prices that could ultimately affect their bottomlines.

The Finance Ministry has made it clear that there is no scope for further reduction in customs or excise duties on crude or other petroleum products. Some cuts were carried out in the middle of last year when crude prices touched record highs and the aim was to spare consumers another price hike. Ultimately, however, the Government had to bite the bullet about three months ago when the prices of petrol, diesel and LPG were raised in line with the increase in world prices. The scenario improved somewhat subsequently when world prices began to drift down and public sector oil companies were able to marginally reduce prices of some products.

Now, world prices have hardened again in recent weeks. The latest news from Vienna, OPEC headquarters, has little cheer for developing countries such as India. OPEC has decided that the cartel's production ceiling be kept at 27 million barrels a day. It had already agreed to reduce output by one million barrels a day in December but this had little impact on international markets which continue to record prices of around $48-$49 a barrel for the most expensive premium WTI crude. One of the reasons for retaining the existing production level rather than cutting the output is that most member-countries violate the quotas. OPEC output is actually about 29.6 million barrels a day as a result of this over-production.

Energy conservation

Simultaneously, OPEC has decided to scrap the earlier price band of $22-$28 a barrel which has become redundant with world prices having risen to much greater heights.

Even the developed world is concerned over the rising fuel prices with the United States and the European Union placing security of energy supplies and cuts in consumption at the top of their agendas.

It is time therefore for policy-makers to think in terms of a concrete strategy for energy conservation to reduce consumption in a big way rather than leaving it to a single body such as the Petroleum Conservation Research Association (PCRA). The need for conservation and utilisation of energy-efficient manufacturing technologies has to be given a much sharper focus than at present given that world oil prices appear to be plateauing at fairly high levels.

Pricing mechanism

In the short term, the Government will have to formulate a fresh pricing mechanism for the national oil companies. The price band system evolved shortly after the United Progressive Alliance Government took over has clearly proved inadequate in the face of world oil prices rising to $55 a barrel in October last year. The Petroleum Minister, Mani Shankar Aiyar, had warned that the under-recoveries to be borne by the oil companies would shoot up to Rs. 20,000 crore in a full year if prices were not raised in November. Even the price hike then, however, did not fully compensate the oil companies for the impact of extremely high global prices. At the same time, consumers also need to be insulated from the volatilities of the world markets and a system must be evolved to ensure that domestic prices remain stable despite global fluctuations.

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