Government subsidies keep fuel prices low, but in the process oil and gas firms suffer losses
International prices of crude oil and petroleum products have touched record highs. Never before in the history of humankind have oil prices gone up to the extent they have in recent months.
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| Paranjoy Guha Thakurta |
On May 22, world crude oil prices hit the US$135 a barrel mark—prices may come down in the near future, but the days of cheap oil are clearly over. We would only be deluding ourselves if we believe that new reserves of this non-renewable energy source would be quickly discovered and the world would be able to continue with its old habits of guzzling hydrocarbons or fossil fuels that take thousands of years to form.
Many people in India do not realize how lucky they are because our government subsidizes petroleum products. Most other countries pass on the increase in international oil prices to domestic consumers. India currently imports roughly three-quarters of the country’s total requirements of crude oil; around two-thirds of this quantum comes from countries in West Asia. If all subsidies were withdrawn from the three major public sector oil marketing and refining companies—Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL)—and these companies were allowed by the government to charge prices that would ensure that no losses were incurred, retail prices of petroleum would shoot up.
At the time of writing (May 26), if no subsidies were provided and oil companies were free to charge customers prices that would enable the firms to merely break even (namely, neither incur a profit nor a loss), each liter of petrol (or motor spirit) would cost Rs 16 more, each liter of high-speed diesel would cost Rs 23 more, each liter of superior kerosene oil would sell at a price that would be Rs 28 higher and, finally, each cylinder of liquefied petroleum gas would cost Rs 300 more.
So we should indeed thank our lucky stars that we live in India. Still, as the old saying goes, there is no free lunch. Somebody has to pay the price and in this case, the ones who are suffering are the oil companies fondly described as navratnas by our political leaders. These companies are at present in a terrible financial crunch. The three oil companies lost an amount in the region of Rs 70,000 crore in the twelve months that ended on March 31, 2008.
One estimate is that during the third week of May, IOC, HPCL and BPCL were together losing not less than Rs 550 crore each and every day. This would add up to a staggering total loss of Rs 200,000 crore over a twelve month period. To place this figure in a proper perspective, it is around 5% of India’s national income or gross domestic product!
If the government allows oil companies to increase prices of petrol and diesel, it will add fuel (literally) to the inflationary fires that are raging. This would obviously make the government even more unpopular than it already is—especially at a time when the next general elections are less than a year down the line. Yet, if the government does not allow the prices of petroleum products to go up substantially, the losses of the three companies would continue to rise and these firms would turn sick.
During 2007-08, the Ministry of Finance had issued bonds worth more than Rs 11,250 crore to the oil companies. But these bonds are just pieces of paper that are neither tradable in the market nor can be used to raise funds from banks and financial institutions. In any case, the issuance of bonds merely postpones the problem; it does not solve it.
The other way out is to cut taxes as various levies—imposed by the central as well as the state governments—together comprise approximately half the retail price of petrol and around 40% of the price of diesel. The Ministry of Petroleum and Natural Gas has suggested to the Ministry of Finance that it cuts the customs duty levied on imported crude oil from 5% at present to, say, zero, and brings down the import duties on petrol and diesel from 7.5% to 2.5%. It has also been suggested that the Finance Ministry reduce the excise duty rates applicable to the two petroleum products.
But cutting taxes may create a new set of problems as the petroleum sector is the single biggest contributor to the revenues of the government that come from levying customs and excise duties. Once the government’s revenues get squeezed, it may have to curtail its expenditures on important schemes, for instance, programmes for the social sector such as healthcare and primary education.
The options before the government are limited. Its hands are tied. It cannot keep everyone happy. What is likely is that the government will try and reduce the burden on the consumer to the maximum extent while squeezing its own revenues and those of the public sector oil companies. So, once again, thank your lucky stars you are Indian. Others are not so fortunate.
The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.
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