Government considering freeing Fuel Prices

May 30th, 2009  |  Published in Business and Finance

The first official announcement on freeing the domestic prices of petrol and diesel from government control came on Friday, when Petroleum Minister Murli Deora said that his ministry is considering de-regulation of the fuel prices.

At current crude oil prices of $60 a barrel, it would mean an increase of petrol prices by Rs 2 a litre, diesel prices will fall by 50 paise a litre.

This seemed to have put direct impact on the shares of oil marketing companies like Bharat Petroleum and Indian Oil Corp were up 8-10 per cent, as the stock market expected them to be able to price the products at market prices.

Retail prices of auto fuels (petrol and diesel) and cooking fuels (LPG and kerosene) are currently regulated in India and oil companies do not have the freedom to align them in line with the international oil prices.

The de-regulation of fuel prices is aimed at giving freedom to the oil marketing companies (OMCs), which have to sell auto and cooking fuels in the domestic market at prices lower than their cost prices.

What is deregulation?

Under a regulated environment, prices are not allowed to rise and fall with market levels. This means that when prices of crude go up, the government, in a bid to maintain fuel prices, shells out money to the oil marketing companies (OMCs) – Indian Oil, Bharat Petroleum, Hindustan Petroleum – to compensate for their losses, a subsidy. Thus, when international crude oil prices peaked in mid 2008 to the tune of USD 145 per barrel, OMCs took huge losses but made up for those to an extent when prices subsequently dropped to USD 30 per barrel levels during the economic recession in the later part of the year. Crude oil price, as of May 28, stood at USD 65 per barrel. Deregulated prices are based on an Automatic Pricing Mechanism (APM) formula as approved by the Energy Regulatory Board. Under a free fuel pricing regime, the OMCs would market fuels after keeping a profit margin for themselves – prices of fuels like petrol, diesel, kerosene, liquefied petroleum gas (LPG) would thus depend on crude prices.

Deregulating prices may help to cut revenue losses at IOC, the nation’s largest refiner and its state-owned counterparts and other OMCs, which sell fuel below cost.

Complete deregulation of prices may not be possible given the volatility in international crude oil prices. If crude oil prices rise substantially – like they did in early 2008 – retail fuel prices may increase substantially too, which may pinch the pocket of the consumer.


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