Fuel price hike: Deora hints at mixed bag

The suspense over the fuel price hike will end soon, with the government due to take up the issue when the Union Cabinet meets later this week.

"A note has been prepared and will be circulated to various ministries from tomorrow. An integrated package, including a price hike for some petroleum products, change in duty structure and issue of oil bonds has been proposed," said Petroleum Minister Murli Deora, after meeting Finance Minister P Chidambaram today.

Deora had called on Chidambaram to discuss the proposal that would be taken up by the Union Cabinet on Thursday or Friday.

The oil minister said prices of all four products "" petrol, diesel, kerosene and domestic cooking gas "" was discussed today. Deora has been against any increase in kerosene and cooking gas price.

Though the petroleum ministry has been advocating a reduction in excise and custom duty of petroleum products, its finance counterpart has been against any change in the duty structure.

According to ministry sources, the price of diesel and petroleum is expected to be increased by Rs 2-3 per litre.

The government had issued Rs 11,000-crore bonds to oil marketing companies last financial year and a similar quantum is expected to be granted for the current year also.

The ministry has projected the under-recovery suffered by public sector oil marketing companies, on account of selling below cost price, to be Rs 73,512 crore during 2006-07, if current prices prevail. Of this, a third or Rs 24,500 will be borne by the upstream companies like Oil and Natural Gas Corporation, Oil India Ltd and Gail (India) Ltd.

The ministry had projected that even if the government increased the prices of petrol, diesel and kerosene by Rs 5 per litre and that of cooking gas by Rs 50 per litre, the public sector oil marketing companies would bear an under-recovery to the tune of Rs 22,000 crore.

Only a per litre rise of Rs 9.33 for petrol, Rs 10.43 for diesel, Rs 17.16 for kerosene and an increase of Rs 114.45 per cylinder of cooking gas will wipe out the under-recoveries of the public sector OMCs.

As the quantum of rise for petrol and diesel is expected to be much lower than any of the above options, and with Deora insisting on not raising the price of kerosene and cooking gas, the under-recovery burden on public sector oil marketing companies is expected to be much more that Rs 22,000 crore.

Basics of Petro Pricing
OIL ON THE BOIL

Import parity pricing
Retail price for petrol is currently determined by simulating the cost of importing petrol from the Gulf and adding on various costs like freight, insurance, bank charges, return on working capital, various duties, taxes and retail margins.

This is called "import parity pricing" and replaces the earlier (pre-2002) "cost plus" pricing prevalent in the administered price mechanism (APM) era.

Under-recoveries
Given the steep hike in the price of crude ($70 per barrel of 159 litres), the government has prevented the oil marketing companies (IOC, BPCL, IBP, HPCL) from passing on the price increase to the consumers.

Under-recovery is the gap between the import-parity price due to these companies and the lower price that they are charging.

The "loss" per litre of petrol for Indian Oil, for example, is Rs 10.55 while it is Rs 9.88 per litre for diesel. These prices have not been revised since September 2005. The loss for kerosene (last revised March 2002) is 16.78 per litre and it is Rs 119.91 per LPG cylinder (last revised November 2004).

According to the petroleum ministry, under-recoveries for the oil companies totalled Rs 40,000 crore in 2005-06 and are projected at Rs 73,500 crore this year, if there is no price increase.

Taxes
Taxes (central 38%, state 17%) account for 55 per cent of the retail price of petrol in Delhi.

The break-up is:

Customs duty @ 5% for crude; 10% for products

Excise duty @ 8 per cent + Rs 13/litre

Education cess@2 per cent

Sales tax@20%

Crude grades

The price of crude depends on grade""for example, Nigerian sweet crude (easier to refine) is cheaper than sour crude.

One barrel of crude will typically yield:

Middle distillates 40 per cent (aviation fuel or ATF, kerosene diesel)

Petrol 20 per cent

Naphtha 10 per cent

LPG 5 per cent

Heavy residues 15 per cent

Fuel losses 10 per cent

The political angle
Since any increase in the price of these items is hugely unpopular, such hikes rarely precede elections (assembly elections have just got over). The government also needs to evolve a consensus for such a hike as its supporting parties (the Left) are opposed to the hike.