ARTICLE AD BOX
New Delhi: The fuel pricing debate is the talking point of the day in India, and for good reason. Petrol and diesel prices have also been gradually rising over the past few weeks, putting another dent in already inflationary food and goods budgets. However, despite these price increases, analysts suggest that India’s state-owned oil marketing companies (OMCs) are unlikely to offset the losses from the recent surge in crude oil prices.
The episode underscores a well-known yet disconcerting fact for all Indian energy companies: retail fuel prices don’t always track crude prices, particularly when the occasion is politically charged. If crude prices rise suddenly, fuel companies may be able to absorb the hit for a while as long as domestic rates are kept fixed. The trouble lies when those losses get too big to ignore.
Petrol and diesel fuel prices have been hiked by over Rs 7 per liter in the past 11 days alone, as part of a cascade of successive price increases. The increases were in four stages — Rs 3, 90 paise, 87 paise and another Rs 2.61 per liter. The hikes are clearly felt by consumers, but market analysts believe they are not enough from the oil companies’ perspective.
The three state-run OMCs, Indian Oil Corporation, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited, reportedly posted huge under-recoveries as crude prices rose sharply in the global market while fuel prices have stagnated in the country.
The push came later this year when the price of international crude oil spiked significantly following geopolitical tensions in West Asia. Indian fuel retailers sold petrol and diesel at older prices for almost 74 days despite the spiraling import cost. In the real world, this translated into OMCs buying expensive crude and being unable to recover the total cost from consumers.
According to industry estimates, losses during this period are expected to reach Rs 1.2 lakh crore. To compensate for those losses and for the sector to return to normal marketing margins, analysts tracking the sector say that fuel prices would theoretically need to increase by another Rs 28-Rs 33 per liter. Such an increase in political and economic terms is extremely improbable, but the calculations make for some sense of why experts don’t look away from further calibrated increases.
The prevailing situation differs from India’s fuel economy in only a few respects, and even then, it is quite structurally complex. The country is highly dependent on crude oil imports, as it imports almost 88 percent of its crude oil needs, making it vulnerable to global supply disruptions and currency fluctuations. A slight surge in crude prices can have a profound impact on refining and retail economics, particularly when the currency is depreciating simultaneously.
What gets the attention is that the financial strain can escalate rapidly when there is a delay in price changes. At the peak of the crude rally, analysts estimated that OMCs were forfeiting nearly Rs 1,600 crore per day. The losses caused are not eliminated by the recent increases in retail prices, but they have been decreased.
Economic factors, such as fuel pricing, also help explain why relatively small changes have such a significant impact. Fuel marketing margins can boost the earnings before interest, taxes, depreciation, and amortization (EBITDA) of oil companies by 7 to 11 percent for every 50 paise increase in margins, market analysts estimate. A slight increase can have a long-term positive impact on balance sheet health for companies with narrow refining and marketing spreads.
Meanwhile, policymakers are stuck between a rock and a hard place. Transportation costs, driven by higher fuel prices, directly impact all other sectors, from packaged food and vegetables to shipping and manufacturing. Further increases in fuel costs could further dampen consumer confidence for families already facing rising costs.
However, ceiling under-recoveries are not easy to maintain either. India’s energy security and fuel distribution systems are crucial, and state-run oil companies are central to them. Long-term financial pressure may impact how they plan investments and make decisions about refining their capacity expansion and future operational security.
But there is a bit of temporary comfort coming out of world markets. Crude oil prices recently remained stable, falling almost 5 percent, as market expectations have grown in line with a relaxation of tensions between Iran and the United States. Traders are increasingly optimistic that diplomatic efforts will help to stabilise oil supply routes, and ease concerns of disruptions in the Strait of Hormuz, one of the world’s most important oil lanes.
Domestic fuel prices may be reduced if global crude prices remain softer in the coming weeks. However, energy analysts warn that oil markets do not quickly reach balance. Often, shipping costs, insurance premiums, and geopolitical risks remain high even after a crisis has passed. That is, a drop in crude prices is not necessarily a drop in financial strain for oil retailers.
The change can be seen in the way attention is paid to fuel pricing decisions now. Rather than a big jump, it seems the government and the OMCs want the hikes to be smaller and more manageable both politically and economically. The gradual approach also helps to cap inflationary shocks and gives oil companies time to gradually improve margins.
Still, uncertainty remains. International crude trends, geopolitical developments, and domestic inflation data over the next few months will be crucial. Crude prices could start rising again, and if they stay high for longer, further increases in fuel prices may become more likely.
The recent price rise of Rs 7 or more might not be the last for consumers. The overall arithmetic of the oil companies seems to be under stress too, and unless the oil markets cool down further meaningfully, the fuel pricing debate in India is likely to be a long one in the coming quarters.
English (US) ·