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Auto fuels set to cost Rs 2/L more as crude hits $90

Oil companies plan to raise petrol and diesel prices by Rs 2 a litre after a week as crude touched a two-year high of $90 a barrel on Tuesday.

, ET Bureau|
Dec 08, 2010, 06.37 AM IST
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Auto fuels set to cost Rs 2/L more as crude hits $90
NEW DELHI: Oil companies plan to raise petrol and diesel prices by Rs 2 a litre after a week as crude touched a two-year high of $90 a barrel on Tuesday, a move that will boost the finances of state-run firms but stoke inflation.

Crude oil has risen about 18% since June 26, when the government last raised diesel prices and allowed public sector firms IndianOil (IOC), Hindustan Petroleum and Bharat Petroleum, which control 90% of the retail fuel market in India, to fix petrol rates themselves. Petrol prices have risen four times since then.

“OMCs (oil marketing companies) are losing Rs 4.71 per litre on diesel. There is a thinking (within the government) to pass on at least Rs 2 per litre to consumers,” one petroleum ministry official, who did not want to be identified, told ET, adding that the government was in no mood to decontrol diesel prices in the near future.

This would make IOC less attractive to investors when the state-run giant enters the capital market towards the end of January for India’s largest-ever equity issue. Oil industry analysts and fund managers say the government’s ad hoc policies on compensating oil firms for retail losses are a dampener for the follow-on public offer, which is expected to dwarf Coal India’s mega issue.

“Global crude oil prices have already crossed $90 a barrel. As diesel prices have a direct bearing on inflation, deregulation is out of question in the current scenario,” he said.

Inflation, which is currently at 8.5%, has reduced from a peak of 11% in June, but stubbornly remained above RBI’s target of 5.5%. Any increase in fuel prices would stoke inflation as diesel powers trucks that transport more than two-thirds of goods in India.

Siddhartha Sanyal, India economist at Barclays Capital, said higher fuel rates would help cut the subsidy burden, but the impact on inflation was a concern. “The headline inflation number is nowhere near policymakers’ comfort. A hike in petrol or diesel prices at the moment would further hinder softening of the headline number, which will have an adverse impact on inflation expectations,” he said.

A rise in inflation expectations can delay monetary easing by the central bank, forcing it to raise rates further to cool prices.

“But a price hike (of diesel) can’t be ruled out as under-recoveries (the difference between local retail prices and the cost of selling imported fuel) of OMCs are increasing,” Sanyal added.

On December 1, Petroleum Minister Murli Deora told a parliamentary panel that oil companies’ revenue losses were expected to rise to about Rs 65,000 crore in 2010-11, about 23% more than what was estimated two months earlier.

But opposition political parties believe that it would hurt people and the government was not acting to curb prices. “The government is quick in responding to demands of the market but when it comes to the common man, it takes its own time in coming out with concrete measures to bring down food inflation,” said BJP spokesperson Nirmala Sitharaman. “It clearly shows the government’s attitude.”

CPI leader Gurudas Dasgupta said, “It will have a greater impact on food prices. It shows how insensitive the government is. When it fails to curb inflation, it is taking steps which will add to the burden of common people.”

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