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High Oil Prices: FINANCE DOUBTS PETRO MINISTRY, by Shivaji Sarkar, 21 Jan, 2012 Print E-mail

Economic Highlights

New Delhi, 21 January 2012

High Oil Prices


By Shivaji Sarkar


It is now official. Rocked by mounting fiscal deficit, the Finance Ministry has expressed serious doubts on the “under recovery” formula of the petroleum companies, which is increasing the burden on an already beleaguered Government. This doubt, in fact, has been repeatedly raised in these columns.


The public sector petroleum companies’ formula puts a severe strain on the Government as it has to fund the difference – either through direct subsidy or through oil bonds. The finance ministry has questioned the methodology adopted by these companies to calculate the so-called under recoveries.


Under recovery is termed as the difference between the trade parity price and the price at which a fuel is sold. The companies claim that because of the restrictions placed by the Government they sell fuel at a discount – less than the international prices. In fact, the oil companies pressurise the Government to compensate the “losses” termed as under recovery, which repeatedly argued, are inflated either to increase petroleum price or to compensate them.


Accepting their plea, the Government has more than once decided to compensate through oil bonds, which are to mature at different dates till 2026. It is often cited as an example of the daddy consuming and the son paying. The mechanism has prevented immediate cash outgo so that fiscal deficit is put in check.


Importantly, the Government is now alarmed at the figures presented by the Petroleum Ministry. During the first half of the financial year under recoveries were calculated at Rs 64,900 crore. For the full fiscal year, the number is expected to exceed Rs 1.3 lakh crore and the Government is expected to take one-third of the burden i.e. over Rs 40,000 crore.


In the first three quarters of this year alone, oil subsidy figures were Rs 30,000 crore over and above the budgeted Rs 23,000 crore. Oil marketing companies (OMCs) say they incur daily under-realisations of Rs 388 crore in the sale of diesel, kerosene and LPG — a cumulative total of Rs 64,900 crore between April and September 2011.


In fact, if fertiliser subsidies are added it is likely to be twice the budgeted Rs 50,000 crore. Rising fertilizer prices contribute to food inflation. The country’s entire fertilizer consumption is derived from fossil fuel. Taken together, these factors have caused the Government to ask Parliament for an enhancement of Rs 1 lakh crore to its spending and borrowing limits. The numbers are worrisome.


This according to the Government is an alarming figure and has asked the Petroleum Ministry officials to look at their methodology. However, the latter not only state that the Government’s cost audit branch has certified the figures, but that the companies should get a little more. But the Finance Ministry has reasons to believe that the oil companies are not presenting an honest picture. It also suspects that the companies are bunching free products such as naptha, engine oil and lubricants in the list of under recoveries.


Apparently, the companies have the right to fix prices of free products. This also means they need not sell these at lower prices. And they don’t. Therefore, meaning that the OMCs are extracting much more than they are entitled to. Put together, it is causing concern as the fiscal deficit is increasing, revenue collection is falling and disinvestment has yielded a mere Rs 11,000 crore against a budgetary target of Rs 40,000 crore. As a result, the Government is pressurising the public sector companies to announce a higher dividend, which the latter is dithering to accept.


In such a difficult situation, the Government is proposing to be tough, question the  irrational demand of oil companies and asking the OMCs to look at the entire refinery products to decide on whether the companies are suffering a loss or not. This is almost challenging the statement of OMCs that they lose Rs 20 a unit and that more they sell more they lose.


There is another suspicion that petrol prices are also charged at unrealistic high and the OMCs are bolstering their profits. In other words the OMCs are raking in a double profit – from the consumers and the Government too. Their balance sheets would be a testimony to the fact that all companies are having higher profits every succeeding year. Unfortunately, the Petroleum Ministry has fudged their profit figures to show that in the first half of last financial year the companies earned a reduced profit.


In 2010-11, the Government projected ‘under recovery’ of Rs 78,000 crore, which was calculated at an inflated purchase price pegged at over $ 120 per barrel, while the actual purchase price was far lower. Petroleum crude prices are fixed on future basis and there is always a yawning gap between the international prices and the actual price at which it is purchased.


The OMCs have been repeatedly doing this and fleecing the nation. And, hopefully the Finance Ministry has woken up to the reality faced as it is with a critical situation. It is giving bonds which are sold in the market and turned into hard cash. The IOC converted Rs. 14,308 crore bonds of 2007-08 into hard cash by selling these in the international market at Rs. 6,503 crore. (Of course, upon maturity the Government has to still pay cash to whoever holds these bonds at that time). The bonds are pawning the future of the nation.


The issue is not of mere profiteering. The OMCs have become instrumental in rocking the economy by increasing fuel prices, which are adding to the inflation of all commodities, bringing down manufacturing growth, consumption and creating a national crisis. Importantly, the Finance Ministry has raised the right questions and is looking at cutting costs. Since it has limitations, it is cutting on Plan spending of Rs 30,000 crore and its move to extract higher dividends from the PSUs is likely to affect the health of many navratna companies.


The Finance Ministry cannot escape probing the claims of the OMC and must endeavour to correct petro prices on a war footing. The reason is amply clear: if petroleum products are eventually sold at lower prices, it could change the entire economic scenario, which at present is clearly dismal. ---INFA


(Copyright, India News and Feature Alliance)

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