Energy is the most vital for the growth of an economy and petroleum is an important constituent of energy. Almost entire transport sector is dependent of petroleum sector and it also caters to the need of cooking gas and kerosene. However, petroleum industry in India is a loss making industry. Market leader of the petroleum sector Indian Oil Corporation (IOC) reported the biggest-ever quarterly loss by a listed company at Rs 22,451 crore in the April-June 2012, while its sister firm Hindustan Petroleum Corporation Limited (HPCL) witnessed losses to the tune of Rs 9,428 crore in the same quarter.

 

The companies have suffered the losses because the Centre failed to keep its word to compensate them for selling diesel and kitchen fuels at artificially low prices set by the government. IOC's loss is three times its previous record of Rs 7,485-crore loss registered in the second quarter of 2011-12. 

 

 

Going by past experience, the companies are likely to post a profit at the end of the fiscal in March, 2013, when the government finally pays up the subsidy amount. But until then, these companies would go through the vicious cycle of borrowing more and spending more to keep going. While that would ensure uninterrupted fuel supply to consumers, the rising interest costs would shave their profit and reduce the ability to push new projects or modernize, which is key to future survival.

 

The oil marketing companies (OMCs) have projected under-recoveries on sale of diesel, cooking gas and kerosene at Rs. 1.9 lakh crore for 2012-13, more than India's defense budget for the current fiscal year or four times that of the NREGA budget. However, many analysts believe that such a huge magnitude of losses reported by OMCs is because of accounting manipulations. There are doubts on the methodology that is adopted by the oil companies to calculate under-recoveries on subsidized fuels and it is felt that these under-recoveries are inflated. In fact in August 2012, finance ministry has decided to re-validate the figures reported by OMCs. 

 

Upstream companies such as ONGC and OIL supply crude to the oil marketing companies. These companies also bear a significant part of the fuel subsidy by giving discounts on the crude they sell to the refiners. 

 

 

In 2011-12, for instance, such discounts accounted for about 40% of the total assistance to oil companies. The 'refiners-cum-marketers' companies like IOC, BPCL and HPCL (called 'OMCs') buy crude from upstream companies, and refine it into diesel, petrol and other 'products'. The 'refinery' arm of the OMC then sells it to the marketing arm of the OMC at the international benchmark price, which sell it to the end-customer. By selling at controlled prices, the marketing arm of OMCs sustains a loss.

 

If we assume that it cost Rs100 to OMCs to produce a unit of diesel from crude. This includes all costs — the cost of the crude itself (which forms the bulk of costs), as well as the costs of refining, manpower and even financing costs. But due to price controls in the Indian market, IOC is forced to sell that diesel at Rs 50. In that case, simply, loss will be Rs 50.

 

But suppose the global market price for diesel, and the cost at which India can import it, is Rs 400. While the 'loss' to IOC is Rs 50, the under-recovery as the government calculates it, is $3 ($4-$1). What the under-recovery approach assumes is that the 'right' price in India is actually the international market price for diesel, and that Indians should pay a rate equal to the cost of importing diesel from the international market and selling it with no subsidy. Thus, the loss of OMCs is inflated due to import parity accounting. However, there is no doubt that OMCs are incurring losses due controlled price of diesel, kerosene and LPG.

 

 

In 2011-12, central government mobilized about Rs 83,700 crore in taxes on various fuel products. The total subsidy payout, on the other hand, to the oil companies to compensate them for under-recoveries, was about Rs 70,000 crore. In 2011-12, it bore around half the total 'under-recoveries' of oil companies. It is also an irony that government is receiving tax and providing subsidy to the same product.

 

In the United States, credible estimates of annual fossil fuel subsidies range from $10 billion to $52 billion annual. However, President Obama has proposed cutting fossil fuel subsidies every year he’s been in office. 

 

The projections for savings have varied slightly each year but always hover around $4 billion annually. Developing countries like China also provide petroleum subsidy to their consumers. Thus almost every country whether developing of developed provides subsidy on petroleum products but the amount of subsidy must be in accordance with the health as well as needs of economy.  

 

Read More : Balance of Payments: Genesis, Problems and Solutions,  Mineral Water Market in India​​​​​​​

Read More : Environment Protection & Development Can Go Hand In Hand​​​​​​​,  Croma - A Growth Story​​​​​​​​​​​​​​​​​​​​​

 

Update your GK and read General Awareness Topics at MBA Rendezvous