Changes in oil prices may be few

The petroleum ministry wants to change the fortnightly price revision practice officially followed by the oil companies after the dismantling of the administered price mechanism.

While in most advanced economies, petrol and diesel prices change daily, the ministry is of the view that change should not be fortnightly any more.

The suggestion, recently made in a note to the Cabinet, also added that the revision should be either monthly or even quarterly since the fortnightly revision was "too frequent". The fortnightly revision of petrol and diesel prices though officially remains on paper; it is not being followed in practice.

Public sector oil companies are incurring about Rs 4.59 and Rs 4.97 a litre under-realisation on petrol and diesel, respectively, because they have not been allowed to change the retail prices since November though the price of the Indian basket of crude has risen more than 27 per cent during the period.

In fact, the mounting under-recoveries on petrol and diesel and losses on LPG and kerosene could see the biggest petroleum marketing firm, Indian Oil Corporation, make its first ever quarterly loss during April-June 2005.

The non-revision of prices had already seen IBP Ltd, a petroleum marketing company, close 2004-05 with a 73 per cent drop in its net profit to Rs 58.87 crore. The profit fell despite a 28 per cent increase in turnover to Rs 13,663.90 crore from Rs 10,711.12 crore in 2003-04.

The company managed to remain in the black only because it recovered Rs 85.48 crore from the Oil Coordination Committee as arrears. Without the arrears, IBP would have posted a Rs 3 crore loss.

Oil company executives said the Indian crude oil basket was hovering over $48 a barrel after touching an all-time high of $52.83 a barrel on April 4, 2005. International oil prices had dipped during December 2004 and January 2005 but started their upward march in February.

Petroleum ministry officials said international oil prices might not significantly decline in the near future. The ministry also wants that the price band mechanism introduced last year be restored.

Making a case for an increase in retail prices, ministry officials pointed out that ministry of finance had, prior to the Budget, agreed to remove all duties on PDS kerosene and domestic LPG along with the reduction in crude oil and other product Customs duties. To maintain revenue neutrality, the excise duties on petrol and diesel were to be increased.

The calculations assumed that international prices would fall after winter but this did not happen. As a result, the price of petrol required an increase of Rs 2.20 a litre while diesel required a Rs 1.06 a litre hike on account of budgetary changes alone.