Standstill period in retail auto fuel prices may impact performance of OMCs

If it stretches beyond this week, the standstill in domestic retail prices of petrol (Rs 96.72) and diesel (Rs 89.62) since May 22 this year may become the longest one in a decade. As the chart shows, it is already inching closer to the previous standstill record between December last year and March this year. That one lasted 109 days and the current one is already there.

Unchanged fuel prices play a big part in softening inflation. Globally, the patience of citizens with rising energy prices is on a short fuse. In Indonesia, there are massive protests this week, while in the UK, one of the first promises new Prime Minister Liz Truss plans to make good on is to reduce energy bills for the citizens.

India hit its record of unchanged energy prices almost two decades ago, in 2005-06, when petrol and diesel prices remained unchanged for nine months.

The first decade of this century was the time when, despite flare-ups in the international prices of crude, domestic prices were kept bottled up for long periods. For most of the next decade, there have been equally frequent pauses but for relatively smaller periods, usually a month to 45 days. These periods usually coincided with elections to some or the other state governments.

So just around the general elections of 2009, fuel prices remained unchanged for five months. Prices of oil in global markets shot up from $58 per barrel in May 2009 to $64.83 by July and $78.02, by March 2010. This was the period when prices of petroleum products used to be adjusted with the price of the Indian basket of crude oil every 15 days, but the government decided to halt the process.

Again, while international prices climbed to $110.72 by March 2011, retail prices were left unchanged for five months. It was also the period when the United Progressive Alliance-II government was facing political heat on a range of alleged corruption issues.

But after this period the government began to adjust prices fortnightly. So even though crude prices did not come off the highs till September 2014, when they finally slipped below $100 a barrel after 43 months, there were regular price corrections.

Retail prices began to be adjusted weekly from April 2016 and then daily from 2017. It helped that international prices remained soft during this period.

How were these losses by state-owned oil marketing companies financed? Before 2005, the Centre ran an oil pool mechanism under which companies shared their profits from selling unregulated petroleum products such as aircraft turbine fuel and heavy diesel to compensate for losses from the sale of regulated items. This was replaced by the oil bonds, promissory notes to pay the companies for their losses. In five years (2005 to 2010) the Centre issued about Rs 1.4 trillion of these bonds, which were bought mainly by banks and insurance companies. These were off-budget items and have now come up for redemption. The current Bharatiya Janata Party government is holding them up as a sign of mismanagement of the sector by the previous government.

From 2011, the Centre instead brought the costs upfront as explicit petroleum subsidies shown in the Budget. In FY12 it was Rs 68,481 crore. By FY21, it had been slashed to Rs 3,421 crore since the companies were resetting their prices with their costs daily.

Till December 2021, there was no period when the prices of petroleum products were held constant for more than 40 days at a stretch. These periods were clearly those of elections to state legislatures like those from April 2018 to mid-May 2018. And again, from the end of June 2020 to mid-August, 2020. Or those from mid-July 2021 to mid-August 2021.

The ministry of petroleum has announced several times that these daily changes will be made by the oil marketing companies with no reference to the government. Top sources in the companies, however, demur.

What has been the impact on the oil companies from these periods of price stasis? The repeated halts to price correction led to a sharp fall in the profits of oil marketing companies. The largest of them, Indian Oil Corporation (IOC) saw its profit drop 27.16 per cent from FY10 to FY11. In FY12, it dropped even more disastrously by almost 47 per cent. The company’s bottom line did not recover till FY16.

Since then, the brief halts to market-led price corrections have not hurt the oil marketing companies significantly because the duration has not been more than one month at a time and they coincided with the dip in global prices. As a result, the data from the Petroleum Planning and Analysis Cell of the Ministry of Petroleum and Natural Gas for the long period, FY13 to FY20, shows regular corrections.

The picture changed from the middle of calendar 2020. There were four periods of one month each that year, when the daily changes were halted. And, in the period from December 2021 till September this year, the prices have almost not moved, except for a brief two-month period of March and April. Together the two periods add up to eight months of price standstill, in a span of ten months. The pressure on prices effectively drove out the private sector RIL and Nayara Energy from the domestic retail market.

In a rating action on August 29, Fitch noted that it “expects IOC to generate gross marketing losses in FY23, as the Indian OMCs bear the largest share of the burden of surging crude oil prices, with only limited increases being passed on to consumers, despite cuts in government taxes on retail sales”. One of the reasons that companies are still in the black is the consistently higher gross refining margins despite the windfall tax levied by the government. Till June it was $20 a barrel and even now is averaging over $10, which has helped IOC and others to cross-subsidise the unchanged retail prices. But it is a tricky equation.

In an acknowledgement that the retail prices will not change soon, Fitch added, “We believe near-term prices will remain a function of the government’s efforts to balance the OMCs’ financial health with the economy’s inflationary and fiscal pressures.” It holds out the promise that the overall marketing segment should turn profitable from FY24 once crude oil prices cool off. By then India’s retail prices of petrol and diesel may have gone through the longest period of standstill in a decade.