Oil subsidy to drastically fall during 2014-15

The oil subsidy burden has come down from 1.39 lakh cr last year to around Rs 80,000 cr this year

The finance ministry has estimated a far lower subsidy burden on account of oil owing to falling crude prices for the year 2014-15 at around Rs 80,000 crore.

According to officials, most of the oil marketing companies have recently renewed their contracts in the first quarter of the financial ending September 2014 and many of them are purchasing fresh as well.

Accordingly going by the range of $90-93 per barrel, the subsidy burden on account of oil has come down from a high of 1.39 lakh crore for the last year 2013-14 to around Rs 80,000 crore.

Officials explained the crude price fall may have been more accentuated in the last few days but it has been consistently coming down for last 7-8 months notwithstanding the occasional spikes seen in the month of June 2014.

According to market sources, with every one dollar fall in crude oil prices, India's import bill drops by about Rs 3,700 crore. After rising sharply in mid-June on fears of supply disruption due to the violence in Iraq, crude oil has been on a slippery slope. From nearly $115 a barrel in mid-June, the price of Brent has been continuously falling and today touched nearly $90 a barrel, a 27-month low.

The weakness in global crude oil prices is primarily due to rising global supplies from countries such as the US and Libya, and subdued demand due to economic weakness in China and Europe. Lower crude oil price along with a fairly stable rupee has resulted in the Indian crude oil basket costing much less now (about Rs. 5,800 a barrel) than in June (more than Rs. 6,500 a barrel).

Moreover sources explained that low crude oil also means lesser under-recoveries to be incurred by the oil marketing companies due to selling fuels – diesel, LPG and kerosene - below cost.

Combined with the monthly 50 paise hikes, lower crude oil prices have wiped out the under-recoveries on diesel – the biggest contributor to the notional losses in the past. Reportedly, the oil companies are now having an over-recovery on diesel, earning Rs. 1.9 a litre more than intended.

With under-recoveries on diesel not a worry (at least for now), and that on LPG and kerosene also set to fall with lower crude oil price, the total under-recoveries of the oil marketing companies are set to fall to under Rs. 90,000 crore in 2014-15 from nearly Rs. 140,000 crore last fiscal year.

For the past many years, the subsidy overhang was a drag on the stocks of the oil marketers. While, the oil marketers mostly get fully compensated for the under-recoveries but money from the government comes with long delays.

Therefore, lower subsidies spell good news not just for the oil marketers which incur under-recoveries initially the first place but also for the upstream companies (ONGC and Oil India) and GAIL (India) which bear 40 – 50% of the under-recovery burden by providing product discounts to the marketers, and the government which bears a chunk of the remaining burden.

Oil marketing companies such as Indian Oil Corp and Hindustan Petroleum Corp have been reducing retail prices. Reportedly, petrol prices were cut 54 paise a litre to Rs 67.86 in Delhi and Rs 75.73 in Mumbai, while diesel prices may also be reduced by Rs 2 per litre.