Slipping on oil

Global oil prices are nearly $90 per barrel; the Indian crude basket is more than $80/barrel. The Indian consumer scarcely knows this, though, since domestic oil product prices remain firmly fixed, and by the look of it will remain fixed till the next Parliamentary elections are over. Petroleum Minister Murli Deora has managed to deliver this state of nirvana by getting the Cabinet to approve the issue of Rs 23,458 crore worth of oil bonds and by forcing the state-owned oil enterprises to absorb the rest of the expected shortfall of Rs 54,935 crore during the financial year. Given the 14 per cent share of "fuel, power, light and lubricants" in the wholesale price index (it's 5.5 percentage points for LPG, petrol, kerosene and diesel), it is obvious that Mr Deora's role in keeping prices down has been an important one, because what is called "under-recoveries" on petrol now total as much as a tenth of its retail price, while for diesel it is even higher at one-fifth. The under-recovery gets still worse for cooking gas (40 per cent), and for kerosene (65 per cent).

This is price distortion of the worst kind, and is not without costs even if these are not immediately obvious. Consider the non-consumer side of the picture. The private sector Reliance Industries, which had been grabbing market share from state-owned oil firms, has virtually given up trying to sell its refined products in the domestic market (it does not get the subsidy that the government gives the state-owned firms) and has become instead the country's biggest exporter of petroleum products "" the share of oil product exports in total exports has risen as a result from 8.4 per cent in 2004-05 to 14.7 per cent in 2006-07, and may have climbed further to 18 per cent this year.

The state-owned oil companies, for their part, do not have the luxury of escaping into export markets and must suffer the vagaries of government policy, which has affected their bottom line as well as their investment plans. To take the figures for the current year, the firms will jointly incur a loss of over Rs 30,000 crore "" a fact that is not lost on investors. The result is that Indian Oil's share price now commands a price-earning multiple of barely 6.5 (about a quarter of the average Sensex stock), while in the case of Bharat Petroleum and Hindustan Petroleum, the P:E ratios are about 4.5 and 4.8. On a combined market capitalisation for the three firms of Rs 75,000 crore, they are valued at less than what just one of them should be worth "" and also less than the value of Reliance Petroleum, which is a new refining company that is still to start business but which is already valued in excess of Rs 80,000 crore!

This is a pointer to how much punishment the government is taking on the stock market. And since companies finance fresh investments by floating new shares and thus capitalising on their share valuation, what the government has done is to make sure that the hopelessly under-priced state-owned oil firms will not be able to play this game. So the oil-refining business will increasingly have only private sector investors who "" being unable to sell in the domestic market "" will be busy exporting their product while domestic demand is met by imports through the state-owned companies.

This bizarre denouement is what Mr Deora has achieved. Meanwhile, even as Mr Chidambaram counts the extra tax revenue being delivered to him by a buoyant economy, he should consider whether as much and more has been lost on the stock market because of the oil-pricing policy. If the government had an annual balance sheet wherein it had to assess the value of its assets (and liabilities) each year, instead of the outdated financial system that it calls its Budget, the disastrous trade-off would be obvious to everyone. Indeed, in today's accounting system, even the oil bonds that are being issued do not show up in the definition of what is the fiscal deficit. It is no wonder that most people are completely unaware of the cost of today's oil-pricing policy.