Everyone knows it is heavily subsidised. Yet, any talk of a price increase
in diesel raises the hackles of political parties. And amidst this chaos,
expensive cars and SUVs are making the most of a hugely cheap fuel.
Oil companies are losing Rs 15/litre on diesel and are terribly concerned
because it is already accounting for over 50 per cent of their projected losses
of over Rs 2,00,000 crore this fiscal. Kerosene and
cooking gas take up the balance but diesel continues to be the biggest area of
concern because its use extends to a host of applications.
The transport sector is only a part of the actual problem. Thanks to the
severe power crisis in many States, generator sets have become inevitable and
need to be powered by diesel. Furnace oil, used in a variety of industrial
applications, has given way to diesel which is a less expensive option.
“Diesel is being used just about everywhere and has got all of us extremely
worried,” an oil sector official told Business Line.
In the automobile sector, petrol has virtually been relegated to the
sidelines since it is dearer by a good Rs 25/litre. This differential could
increase to Rs 30 if the oil companies have their way and go in for a petrol
price hike in the coming weeks. When that happens, use of diesel in cars will
literally shoot through the roof.
Automakers reckon that if this trend continues, diesel cars will account
for 85 per cent of total sales which is catastrophic news for manufacturers
like Honda whose lifeline is petrol.
Logically, the subsidy element on diesel should also be knocked off at one
go in order to bridge this yawning gap with petrol but the Government can, at
best, contemplate a hike of only Rs 3/litre. Even this will have the Opposition
baying for its blood as was evident recently when the subject of diesel price
deregulation cropped up.
As long as this inaction continues, use of diesel will continue unabated
even as its supplier trio – Indian Oil, Hindustan Petroleum Corporation and
Bharat Petroleum Corporation – is bleeding by the hour. It was all very nice
for the Government to reiterate after the Budget that it would have to ‘bite
the bullet' on fuel pricing but reality is different.
Inflation is hurting households already and the fear is that a diesel price
hike will only make things a lot worse. However, this impasse will only see
losses piling up for the oil majors and there is no telling when the bubble
will burst eventually.
IOC, HPCL and BPCL are already borrowing heavily and the combined figure is
already in excess of Rs 1,30,000 crore. Officials of these companies are concerned that this will lead to an ‘Air
India-like situation' when banks will simply refuse to lend one day. “When that
happens, we are dead and this is something the country just cannot afford at
this point,” an oil industry executive said.
By the end of the day, it is the responsibility of the PSU oil marketing
companies to ensure fuel supplies across the country. Their private sector
counterparts like Reliance Petroleum and Essar Oil have no such obligation
simply because they cannot afford to retail petrol or diesel at a subsidy. And
even if they choose to, they are not eligible for a compensation mechanism like
IOC, BPCL or HPCL. The best bet, therefore, is exports and this has emerged a
profitable option for private players.
Clearly, the Government has a tough task on its hands. Its fiscal deficit
projection of 5.1 per cent for 2012-13 could just go out of the window if the
issue of fuel pricing is not taken up quickly. The oil companies have literally resigned themselves to the fact that
nothing radical is likely to happen especially when petrol prices have remained
untouched for months.
In June 2010, the Government had proclaimed that petrol would be removed
from the administered pricing mechanism. Since then, its price has gone up by
over 50 per cent but, of late, amidst stiff political protests, the companies
have been asked to put off any further price increases. Little wonder,
therefore, that they are sceptical about any revision in diesel prices.
“It is all very nice to maintain the status quo and pretend that nothing is
wrong. However, it is only when each of the oil companies begins falling sick
and fuel supplies are severely affected will people realise that paying more is
a better option,” an oil sector official cautioned. By then, it could just end
up being a little too late.
And tough times are here to stay. Global crude prices are already averaging
$115 per barrel and show no signs of cooling off. The need of the hour is some tough talking from the Government. There are
no indications of this happening for sometime now.
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