The Hindu Business Line : Oil refiners upbeat on free fuel pricing

Mumbai, May 29 Public sector oil refiners have welcome the prospects of free pricing for petrol and diesel going by what Petroleum Minister, Mr Murli Deora, said in New Delhi on Friday.

“This is the best piece of news and it will put an end to all the anxiety relating to subsidies, losses and an eventual compensation package,” an oil industry executive told Business Line.

He added that it would be ideal if the Centre transferred the subsidies on liquefied petroleum gas (LPG) and kerosene to the Union Budget so that the refiners (IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation) are spared of this burden in their books.

The announcement by Mr Deora will also be music to the ears of private oil companies such as Reliance Industries and Essar Oil, which have had to face huge challenges in 2008-09 when global prices reached dizzy levels.

Reliance closed down all its 1,432 retail outlets but has recently indicated that operations will be restarted. It should have no worries if auto fuel prices are linked to the market. Similarly, multinationals like Shell would also be tempted to set up more outlets (it has a little over 50 now).

Price band system

Obviously, what will be the biggest worry is the implication of free pricing should crude prices spin out of control as they did in the first half of 2008 when they were close to $150 per barrel. Today, they are hovering at $65 per barrel, which is “more manageable” from the end-user’s point of view in an era of market-determined pricing.

It is precisely for this reason, sources say, that the Petroleum Ministry would be more inclined to follow a ‘price band’ system where it will not intervene till crude prices exceed $75 per barrel and the customer will have to be protected as a result from any hike in diesel and petrol prices. “Diesel is the biggest concern because it can stoke inflation,” experts say.

The issue of free pricing has been hanging fire since the time an expert committee set up by the Centre had recommended complete abolition of the administered pricing mechanism way back in 1997.

Oil refiners have suffered over the years especially when they have had to sell petrol, diesel, LPG and kerosene at subsidised prices. The last fiscal was especially the most trying and the losses as a result totalled over Rs 100,000 crore, though a compensation package was also worked out.

The upstream sector, comprising Oil and Natural Gas Corporation (ONGC) and Oil India, would also be relieved in an era of market-determined pricing as this will spare them the bother of discounting crude and products to the refiners as part of the subsidy support mechanism.

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