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The oil pool dilemma - Views on News from Equitymaster
 
 
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  • Jun 30, 2000

    The oil pool dilemma

    The Ministry of Petroleum & Natural Gas (MoPNG) is probably working overtime (sounds unreal) to figure out a way of curbing the oil pool deficit which is hurtling towards the Rs 130 Rs 160 bn.

    Meanwhile, crude prices show no sign of relenting and continue to remain firm with Brent crude trading at $ 30.3/barrel and August futures trading at $32.7/barrel. Crude prices continue to remain firm despite the two production hikes by the Organisation of Petroleum Exporting Countries (OPEC) in FY01. The first hike of 1.7 million barrels / day (mb/d) was in April while the second hike of 0.7 mb/d was more recent, on the 22nd of June. The OPEC plans to meet next on the 21st of September. With crude prices not softening the markets are already speculating another hike even before the next meet.

    However, the title of villain of the piece seems to shifting from the OPEC to America, where gasoline prices are surging, which is keeping the futures market firm. The rise in gasoline prices is due to a couple of reasons:

    • The environmental regulatory authority has stipulated usage of cleaner fuels, which has increased the cost of production.

    • Summer is the peak season of petrol consumption, resulting in a demand supply mismatch. US petroleum stocks are said to be declining, which signals higher prices.

    • Most importantly though the Federal Trade Commission (FTC) suspects collusion amongst the refineries to keep prices up. This will result in higher refining margins, shoring up their bottom lines, which were affected in earlier years due to the sharp fall in petroleum prices. Subsequently, there has been a marginal decline in petrol prices with the Justice Department threatening to file an anti trust suit.

    Coming back to India, the high crude spot and future prices continue to trouble the MoPNG. The OPA deficit will continue to balloon unless the Government is able to chalk out a solution. The alternatives available with MoPNG are not many:

    • It can increase the final prices of petroleum products namely, diesel, kerosene and LPG. However, this move will not go down well with the populist factions of the Government. Further, it will threaten to hike inflation rates, which are already under pressure.

    • It can request the Ministry of Finance (MoF) to reduce the excise duty on petroleum products as these are in built in the prices. The incidence of which basically falls on the MoPNG as final products (diesel, kerosene, LPG) are subsidised; this duty in turn is revenue for the MoF. The Government as a whole is not becoming poorer though.

    With high crude prices the MoF will collect duties more than anticipated by Rs 80 bn. It only makes sense to reduce the duties, as higher final prices will have direct and indirect consequences on the economy.

     

     

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