Oil marketers await further hikes in petrol, diesel prices to cut losses

Even as global crude prices have soared, the oil marketing companies (OMCs) have been unable to take further price increases since April to completely recover their losses. Not a one-off, this happens each time international crude oil prices are volatile.

In the past, this has often led to a situation where state-owned OMCs, such as Indian Oil Corp. Ltd (IOCL), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL), are left with limited legroom for a downward revision when crude oil prices correct as the focus is on cutting their losses by continuing to charge more from the consumer.

“As things stand today, to normalise margins by reducing their under-recoveries, OMCs need to hike petroleum prices by an estimated Rs 10 per litre and diesel prices by at least Rs 20 per litre,” energy analyst at financial services firm IIFL Securities, Harshvardhan Dole told Business Today.

Petrol and diesel prices were hiked 14 times in the March 22 to April 6 period. Thereafter, no further hikes in fuel have been affected in the last 36 days.  A rising fuel bill

India imports over 85 per cent of crude oil to meet its domestic requirement. As the world’s second-biggest oil importer, the country spent $119.2 billion in FY21-22 vs. $62.2 billion on the commodity in the previous fiscal, according to data from the Petroleum Planning & Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas.

“We have neither been able to increase domestic production nor been able to attract foreign exploration companies here for a variety of reasons. Besides, the uncertainty surrounding the government policy on the oil & gas sector has also had an impact,” said Kirit Parikh, chairman & founder of New Delhi-based energy think-tank Integrated Research and Action for Development (IRADe).

The country imported 212.2 million tonnes of crude oil in FY21-22 as compared to 196.5 million tonnes in the previous fiscal. India’s foreign exchange reserves which stood at $633.61 billion on December 31 last year, had declined to $597.73 billion on April 30 amid depreciation in the value of the rupee and a higher crude import bill.

Refining margins helping offset losses

On the flip side, with the increase in crude oil prices, the underlining refinery margins have also gone up. Oil refineries turn imported crude into value-added fuels like petrol and diesel.

“With OMCs charging higher refinery margins, they may be able to recover a part of their losses. So, while they are making losses on pricing, they have gained on refining margins. That has provided a breather to the government to not increase pump prices,” said IIFL’s Dole.

In a country where fuel price increases are deemed to be a politically sensitive issue, any serious attempt at relieving the burden on OMCs would, therefore, require concerted action by all stakeholders. For instance, from November 2021 to March this year, no price increases were undertaken despite benchmark crude prices rising by $27 a barrel, ostensibly due to assembly elections in five states.

“Some of the burden needs to be collectively shared by the central and state governments, the public sector and consumers. At the same time, it is important that states reduce ad valorem taxes on oil while the central government must reduce import duties,” said Parikh. “Petroleum, for instance, is used not just by car owners but also by millions of middle-class two-wheeler users across India,” he added.

In India, which is the world’s largest motorised two-wheeler market, domestic sales in FY21-22 stood at more than 1.34 crore units, according to data from the Society of Indian Automobile Manufacturers (SIAM).

Experts say that consumers may get some reprieve if the central government manages to convince states to reduce taxes on fuels. Once state governments do that, the central government will likely follow suit by reducing excise on crude.

Also read: Retail inflation likely accelerated to an 18-month high of 7.5% in April

Also read: Oil prices fall over 1% on recession fears; Brent crude reaches $106.26/bbl