CRUDE OIL IN INDIA

Economic Reference Prateek The prevalent conditions of the countrys crude oil inputs & the mechanisms of the petroleum pricing seem to be outlandish. The crude oil Industry is expected to bore under recoveries to the extent of a whopping 460 crore Rs/day. This has hit the profits of the upstreams & downstreams by capacity. If we consider the overall annual under recovery for the industry than it accounts for a mammoth or monumental 170000 crore Rs. This is a burning situation as far as the sector is concerned. The subsidy sharing mechanism by the Indian Government has always been the topic which attracts lot of attention. The burden for the OMCs (Oil Marketing companies) has been around 7-8% in the last year which still made up 7000 crore Rs. It is ultimately you and me who has to bear the burden as the prices have gone up to an unprecedente d 115 US $/barrel. Let us see how the conditions point toward this: Last year the total under recovery was to the extent of Rs. 78000 crores out of which 41000 crore was borne by government as they had committed to do so. Another 30000 crore Rs of subsidy was shared by the upstreams. The rest 8-9% of the subsidy amounting to 7000 crore rs was bore by the OMCs. But this year the conditions have gone even worse. As against the expected fall in the price of crude oil, it has risen up from 85 US$/barrel to 115US$/barrel. This accounts for a hike of 35.29%.Thus making the total amount of the under recoveries projection to be around 170000 crore in the year as quoted earlier. The segment wise details of the subsidy burden are as under : Petrol: 1.98 Rs/Litre Diesel: 15.44 Rs/ Litre Rs Kerosene: 27 Rs/Litre LPG: 359 Rs/cylinder It is quite clear that if even these prices are passed on to the customers than only the situation of inflation in commodity will worsen. Now, in the last fiscal the Government share of subsidy was around 52% and of the upstreams was 38.46%. The policies of last year wont work out this year, mainly on account of huge under recoveries. The government share can rise up to 90000 crore rs if it contributes in line with the same percentage as it did last year, but this amount is gigantic and would take a lot of money from the bags of government. Also the share of Upstrea ms will be out of comfort zone if OMCs are made to contribute the same 8-9% as it did in the last fiscal, than the share could up to a minimum of 14000 crores. Where will the profitability go then????????? This remains a question still unanswered and appears as a road bump on the way of the OMCs to take its decisions about the capex levels, external or internal borrowings etc. The picture needs to be cleared up sooner rather than late.

Comment [P1]: Find out whether these are the subsidies for OMCs or the total industry.

CRUDE OIL IN INDIA

Economic Reference Prateek Its quite evident that somewhere down the line the burden of it has to be passed on to the customers, only the extent of it is unknown whether it will be a substantial burden or even above substantial. You and I have to get ready to face another hit at the prices as even RBI governor talks of passing the price rise at the time of announcing the latest credit policy of central bank on its current issue of !7th June11, although no directives have been given yet. The government at the moment applies customs on the import of crude oil at the rate of 7.5% and collects Ad-valoreum as well. Thus its playing a double role by collecting taxes and duties on one hand and giving back huge subsidies on the other side.