It is very difficult to independently establish the exact impact of changes in crude oil and gas price on the Indian economy. There are multiple crude benchmark prices. Prices vary according to the grade of oil sold. The Indian crude basket tracks a weighted average of Brent, Dubai and Oman. Brent itself consists of four different grades of crudes. Another major benchmark rate is that of West Texas Intermediate (WTI). International gas pricing is even more complex with even larger variations.
On top of variable crude oil and gas rates, changes in foreign exchange rates affect prices in rupee terms. Since the retail price of most products is fixed, the oil marketing companies (OMC) calculate under-recoveries according to a set of formulae. The actual cost of refining and distribution is not necessarily the same as the formulae.
Under-recoveries are met via further opaque calculations. The OMCs state their under-recoveries according to formulae.
The government issues oil bonds for some under-recoveries. Upstream PSUs like ONGC and OIL as well as GAIL are asked to bear some of the burden. Some of the losses are borne by the OMCs themselves.
At the same time, the central government collects taxes on products, which it shares with the states, according to yet another formula. The state governments also impose their own taxes. The OMCs present balance sheets taking the oil bonds into account. These are actually long-term illiquid instruments that can only be sold at deep discount through a special RBI facility.
It is pretty much impossible to follow through this sort of complicated accounting with any degree of confidence. On any given day, the OMCs may be losing several hundred crore in under-recoveries. So, even minor errors in calculation would balloon into massive errors at annual estimates. Analysts and investors therefore, have no choice except to accept statements as made.
Broadly, all one can say is that high crude oil and gas prices have a negative impact on OMCs, while lower prices have a positive impact. High prices don’t have a very positive impact on the upstream producers because the upstream PSUs have to share the subsidy burden.
Political sensitivity means that chances of full product price decontrol is very remote. Nor is the government likely to simplify the situation by netting off taxes versus subsidies because of the balance of powers between the states and the centre.
Under the circumstances, no prudent long-term investor should touch OMCs with a bargepole. However, these are interesting instruments to trade since they have adequate liquidity and these are available in the stock futures segment. The weak global economy has led to a falling trend in crude oil prices. If this continues, there may be an upside to BPCL and HPCL through the current quarter.
The author is a technical and equity analyst
