Tag Archive: OMC

A lot is being said and written about high international crude oil prices. Let’s have a closer look at it. Currently international crude oil prices are hovering around $130/barrel. The last time the petrol & diesel prices were revised was in June 2006, almost 2 years ago [Obiviosly I am not considering the recent hike! Adds to the dramatic effect ;) ]. At that time crude was trading at $63/barrel. Now the price has more than doubled but the petrol and diesel prices remain untouched due to the underlying political sensitivities. With a string of embarrassing defeats in successive legislative assembly polls, the government thinks that it can ill-afford to raise the retail prices of petrol & diesel. However the losses of Oil Marketing Companies [OMC’s] are mounting by the day. Just a couple of weeks ago, IOC chairman Sarthak Behuria said that the company has cash available only till September to fund imports. This statement bodes ill not only for IOC but also for India as a whole. With the nation almost on the verge of an oil crisis, the government has limited options before it. Let’s have look at them. As a first option the government can raise the retail prices substantially to reduce or even expunge the under recoveries of these OMC’s. But this is highly unlikely given that general elections are just round the corner. Besides the already fired up inflation numbers will get further stoked. So this option is ruled out. Secondly, the government can rationalize the oil duties to reduce the impact of high crude prices on the balance sheets of the OMC’s. However the finance ministry is strictly opposed to it as it will hamper it’s revenues given that oil duties make up for more than 30% of government’s revenues. It is demanding for the imposition of additional cess or surcharge to make up for these losses. However even this is unlikely to be accepted both by the government as well as the Left parties. As a third option, the government can use a combination of 1st and 2nd options to provide some sort of relief to these oil retailing companies. This proposal is expected to pass the political muster of both- the ruling UPA party as well as it’s Left allies. Whichever option the government chooses, one thing is for sure- that the days of low petrol and diesel prices are gone for good. The government must quickly get its act together and tackle this issue with utmost urgency rather than postponing it. As it is said that a government can either be good one or populist one. Hope it chooses the former option

– Abhinandan

At a time when the country seems to have reconciled to the fact that a rise in price of petrol and diesel is inevitable, I fail to see how the government can continue to have such an indifferent attitude to the long term impact on the nation’s finances by continuing to subsidize these items.

When we talk of crude oil prices, we are referring to the spot price of sweet crude on New York Mercantile Exchange (NYMEX). The average cost of crude oil that our country imports turns out to be 94.62 US $ /barrel, and noting that one barrel is about 159 litres, this translates to be equal to Rs 23.78 per litre of crude oil. OMC (Oil Marketing companies) convert crude oil into petrol and the process is quite capital intensive. Thus the cost to the OMC’s is substantially higher than Rs 23.78 /litre of petrol, but in return they are paid just Rs. 20.38 /litre. Compare this to the price you and me pay for our petrol and we have a price jump of nearly hundred percent(Rs 43.52 / litre of petrol in Delhi). This includes an excise duty component of nearly 72% of the price paid to the OMC’s (Rs 14.66) and sales tax of Rs.7.26. The OMC’s get a mere 20.38 Rs for a litre of petrol they sell.

In order to partially compensate them for the difference, the government issues them oil bonds – a liability for the future. The government means to ‘Have the cake and eat it too’, but what it fails to realize that all it gains is an illusion of lower inflation. Neither will it sacrifice on the huge excise and sales taxes (which by the way contributes to a third of all gross tax revenues collected by the government) nor will it let prices of oil rise. But at what cost? Oil bonds have created a huge burden of around 60,000 crores on the government to the OMC’s which some time in the near future will have to be squared off. Then the share price of OMC’s have highly underperformed at a time when all other sectors are booming- the reason being that bonds are not hard cash, that may be used by them to run operating expenses and carry out their growth plans. This eats into their profits, thus causing company’s performance to nosedive. This again makes the government the biggest loser as it is the highest shareholder in these companies and so loses the most. The current situation in India is comic where both high taxes and high subsidies exist ! It makes us ponder about what the government is really upto??