Government weighs fuel price hike as crude hits $108 – ET

Posted on February 23, 2011 by


NEW DELHI: An empowered panel of ministers will meet shortly to decide if fuel prices should be raised, and by how much, top government officials said, as continuing unrest in oil exporting countries such as Libya has hoisted Brent crude oil to more than $108 a barrel — its highest in two-and-a-half years.

Apart from rising crude costs and mounting losses from selling diesel at low state-set rates, refiners are also worried about supply disruption at a time when a lingering payments crisis with Iran threatens to choke about 12% of Indian imports. India imports about two-thirds of the oil it consumes.

But a senior government official said the country had enough stocks of crude oil and refined products to fuel cars, trucks, factories and aircraft for 45 days. Further, crude oil exporters such as Saudi Arabia, Abu Dhabi and Kuwait have enough surplus capacity to quickly offset any loss of production from countries facing protests.

Brent crude oil rose to $108.57 a barrel on Tuesday, up 50% since June, when the government had frozen diesel prices. State refiners, who control more than 90% of the retail market, are allowed to raise petrol prices, but they have not raised rates to market levels as they fear that this would not go down well with the government. While petrol is selling at Rs 4-5 a litre below market rates, diesel is more than Rs 10 below free-market prices.

“The empowered group of ministers will meet very soon. The options are clear. Either raise prices or increase subsidy,” a government official said.

Oil Minister Jaipal Reddy recently said that there was no move to raise diesel prices, but crude has climbed 10% since then.

“The competent authority has suggested that the group of ministers should quickly meet,” the second official said.

While India is adequately stocked to supply fuel for a month-and-a-half even in the unlikely event of a complete halt in crude imports, it is not adequately equipped to handle high crude prices, which international analysts say will not ebb soon.

The government is in a dilemma. It has resisted moves to raise diesel prices, fearing it will stoke the already-high inflation and give opposition parties ammunition to attack the ruling coalition. But if it does not allow companies like Indian Oil Corporation to raise the price of diesel, it will inflate the subsidy burden and upset the fiscal calculation of Finance Minister Pranab Mukherjee who will present the budget next week.

Crude oil’s latest rally has revived memories of 2008, when crude rocketed to $147 a barrel and the burden of subsidies ballooned to more than Rs 103,000 crore. When Brent crude was about 10% lower than current levels, Jaipal Reddy had said last week that the subsidy bill in the current fiscal was expected to be Rs 80,000 crore, but it could rise to Rs 100,000 crore.

The International Energy Agency, which advises developed countries on oil matters, said it was on the alert. “The IEA stands ready, as always, to make oil available to the market in the event of a major supply disruption if alternative supplies cannot readily be made available via normal market mechanisms. At present, we are not in a situation where that is necessary. However, we are monitoring the situation closely and on an ongoing basis,” it said on its website.

Shares of state-run refiners fell on the stock market amid concerns of rising crude prices and government controls on prices of 60% of their output.

Posted in: India