The proximate reason for the hike in petroleum product prices last month was the likelihood of shortages in these products, as cash-strapped oil firms ran out of money to import crude. To the extent that crude oil prices have dropped since then, after rising briefly to $147 a barrel a month ago, the situation is more manageable today, but shortages have started cropping up again. The waiting lines for CNG in the capital have lengthened; new connections for LPG cylinders are routinely delayed; and reports of diesel not being available keep surfacing as oil firms try to push the premium blends where losses are lower. The reason is simple – over and above the ‘under-recoveries’ which the oil companies have to bear, the government has still to pay the companies around Rs 60,000 crore of past dues, which it is committed to doing in the form of oil bonds. Some Rs 40,000 crore out of this is for the last quarter of 2007-08 and the first quarter of 2008-09, while the rest is for the current second quarter of 2008-09. So far, companies have managed to stay afloat by selling old bonds that are with them, but all these have now been sold, so that tap has run dry. Companies have also been putting off routine capital expenditure (no new petrol pumps are being set up by any of the state-owned oil firms), and postponing greenfield investments. Since the explanation for the delay in the government issuing fresh bonds is that Parliament has to approve them, the issue of fresh bonds could get delayed for some weeks yet, as no date has been set for reconvening Parliament. If the session is delayed indefinitely, more petroleum product shortages are on the cards.
What can be done to avert a crisis? The obvious thing to do is to pass on the cost of petroleum products, so that the oil marketing companies do not need subventions from the government. But such straightforward logic will doubtless be dismissed by our wise political leaders as naïve. A second option would be for the oil companies to borrow from the open market, but this is not an inexhaustible resource as credit limits come into play. If the only option that remains is to catch one’s nose the long way round, then oil bonds present themselves as an option, but then Parliament has to meet. A final option might be on-account payments being made to companies, but whether the Constitutional scheme on parliamentary oversight permits this will have to be examined.
Under its Special Market Operations scheme, the Reserve Bank of India has been drawing on its foreign exchange reserves to give the oil companies dollars in exchange for the oil bonds, so that the companies can import the crude needed in their refineries. But the oil bonds are exhausted, so the oil companies are forced to buy dollars in the open market. As a result, the rupee, which had stabilised when the RBI’s Special Market Operations were on, has started to depreciate. The only way to arrest this is to dampen demand, which means raising petroleum product prices. Because of the price distortions, industry has started using diesel in place of furnace oil. So diesel consumption, which grew by 1-2 per cent per annum in previous years, is rising by over 20 per cent. In short, the chickens are coming home to roost.