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Energy: Short-term blip

Apr 11, 2002

The surge in oil prices has unnerved markets, globally, leading to weak performance over the past month. Threat perceptions about U.S launching a military offensive against Iraq, as the latter refused to permit U.N officials to inspect the country's arsenal, seems to have triggered the run. Further heat has been generated with the intense Israeli offensive against the Palestine's in the West Bank region, which deteriorated geo-political equations in the region. With tensions in the Middle East, crude oil prices touched new six-month highs of $28.2/ barrel before softening to current levels of $25.8/ barrel (Brent blend). Prices of the natural resource have gained 23% year-to-date (YTD) and are higher by 44% from the lows in the January '02. These developments threaten to put a spanner in the works of smooth dismantling of administered pricing (APM).

      The leaks
  LPG* Kerosene**
Consumption (units) 412 10,215
Subsidy/unit (Rs) 90 3
Total subsidy (Rs m) 37,102 30,645
Domestic price/unit (Rs) 264 9
*m cylinder ** m litres

The pressures seem to have led to differences arising between the Ministry of Finance (MoF) and the administrative ministry, Ministry of Petroleum & Natural Gas (MoPNG). The administrative ministry, it seems, is in favour of maintaining stability in petroleum prices. The thinking could be guided by ensuring smooth transition to a market determined pricing mechanism. However, to reduce the plight of marketing companies from higher oil prices, HPCL, BPCL, IBP, IOC and the administrative ministry are lobbying for a reduction in central excise duty rates of petroleum products. Considering the challenging revenue mobilisation environment, the MoF is not in a mood to concede.

As per reports, the MoPNG has decided on a mechanism for establishing parity with international prices. Marketing companies will be allowed to revise petroleum prices fortnightly. The current spike in prices seems more due to regional instability and are likely to reflect fundamentals, as the situation reverts to normalcy. Over a quarter, marketing companies are likely to be empowered to adopt free pricing. Also, oil prices are likely to revert to fundamentals. Consequently, earnings of marketing companies are likely to be impacted only in the immediate term.

Based on our estimates, at current prices, the subsidy burden on the centre from LPG and kerosene is Rs 67.7 bn. The Rs 20 roll back in LPG prices is likely to have added Rs 8.2 bn to the subsidy bill.

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