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Energy - Waiting for independence

Aug 28, 2000

Oil prices have hit the roof since they started their climb in the beginning of FY00. This has adversely impacted the oil pool account, as there has been no revision in the final consumer prices of fuel. Consequently, the operating margins of oil companies have taken a hit and they must be keenly awaiting the dismantling of the administered pricing mechanism. The deregulation in the marketing segment is expected by March '02 and oil companies have started beefing up their marketing arsenal to take full advantage of this liberalized scenario. The marketing function is gaining importance for the following reasons:

  • Although with rationalization of tariffs the gross refining margins (GRM's) should improve the overcapacity will keep refining margins under pressure. This will make marketing assets crucial to prevent erosion of aggregate operating margins.

  • In an over-supplied market the bargaining power will shift from the seller to the buyer. Thus bargaining power of marketing companies will increase.

  • Post 2002, the marketing margins should increase, as they are significantly higher in the deregulated markets.

  • Bulk buyers or industrial users will have greater bargaining power in an over-supply situation and realizations in this segment will be first to be hit. Therefore, presence in the retail segment will be important as it allows greater control over prices.

Fluctuations in crude oil prices have made refining margins more volatile and subsequently also the businesses of refining companies. Oil companies will be looking forward to the deregularised scenario to ensure greater stability in earnings.

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