What is the agenda behind the expected petrol price cut?

In a bizarre move, state-run fuel retailers are likely to reduce petrol prices by as much as Rs 2 per litre w.e.f. Thursday, 17th Nov, 2011, signalling the first reduction in rates since Jan 2009. The reasons cited for such a move are the softening in global crude prices and a moderate stability witnessed in dollar movement. But the reality is far from the truth.

In fact, since the last price hike, crude prices have gone up and so was the case with the dollar rate. We see no reason why the OMCs would decrease the price of petrol, and that too now, when their subsidy burden is on the rise. We believe that OMCs are taking this decision due to political pressures, and the economics of business do not call for the same.

When the last hike in the petrol was effected on 3rd Nov, 2011, the price of crude was at $109.65/barrel, and the rupee-dollar rate was at Rs 49.20. Today, crude is at $111.50/barrel and the rupee-dollar rate is at Rs 50.61. 

We fail to understand the logic behind a rollback at a time when the OMCs are losing Rs 300 cr per day on the sale of subsidised fuel. We would like to remind our readers that in the recently-concluded Q2 earnings season, OMCs have reported a massive loss of Rs 14000 cr, despite the previous 4 rounds of petrol price hikes. Hence, one can only wonder what will transpire in the coming quarters with this price rollback.

Particulars	15-Jan-11	5-May-11	16-Sep-11	3-Nov-11	17-Nov-11
Petrol Hike/(Rollback)	3.50	5.00	3.14	1.80	(2.00)
Rs per litre (Mumbai)	63.08	68.33	71.92	73.81	71.61
Brent Crude Oil	98.57	118.83	110.36	109.65	111.50
(% Change)		20.55	-7.13	-0.64	1.69
Rs/$	45.11	44.34	49.52	49.20	50.61
(% Change)		-1.71	11.68	-0.65	2.87
Nymex Crude Oil	96.64	101.14	88.44	93.67	97.95
(% change)		4.66	-12.56	5.91	4.57

As per the above table, the price hike between 15th Jan, 2011 and 5th May, 2011 was justified by the sharp rise witnessed in crude oil prices. As a result, the OMCs hiked retail petrol prices to safeguard themselves against any potential loss on the subsidised sale of petrol.

The price hike between 5th May, 2011 and 16th Sept, 2011 was led by the sharp rupee depreciation, and was done so as to compensate OMCs on their interest cost as a result of foreign borrowings.

The latest price hike undertaken on 3rd Nov, 2011 was also on account of a spike witnessed in crude prices, and also, to compensate OMCs on the losses reported in their quarterly results. In fact, we had even questioned the rationale behind the last rate hike, as the OMCs hiked petrol prices when they were making heavy losses on the subsidised sale of diesel, LPG and kerosene.

We, at DSIJ, believe that the price hike rollback is a politically-driven move to please the vote bank and douse the anger ahead of the Parliament’s winter session, scheduled to begin on 22nd Nov, 2011. By virtue of the de-control mechanism, OMCs have been free to decide the street prices of petrol, but in practice, they can never do so without an informal nod from the government. Hence, even though the petrol prices are said to be de-regulated and sensitive to the international price movement, the ground reality is quite different, and it seems to be totally under the government's whimsical control.