After 12 years, OMC losses end on diesel retail sale

Oil firms see small profit of 35 paise a litre from Tuesday

The fruits of phased diesel price decontrol are being reaped by the three government-controlled oil marketing companies (OMCs), with the fuel giving them a small profit of 35p a litre from Tuesday, the first time these sales have turned positive in 12 years.

The continued decline in crude oil prices has helped these companies reach a stage where a cut in the retail price is possible, the first time in seven years. The OMCs are, however, not planning any change till the end of this month.

According to the Petroleum Products Analysis Cell, the petroleum ministry’s technical arm, diesel sales will enter a phase of overrecovery for the pricing fortnight beginning Tuesday. The overrecovery of 35p on sale of every litre has strengthened the case for a formal price decontrol, beside easing the government’s Rs 63,000 crore yearly petroleum subsidy burden.

The earlier government had decontrolled petrol prices in June 2010. For diesel, in January 2013, it decided on a gradual rise in prices (of 50p a month) till the retail rate equalled the global benchmark price. This was done since diesel prices had a higher impact on inflation than petrol.

Brent crude oil has fallen to $96 a barrel, the lowest in 26 months, on falling demand from the largest consumer, China, amid over-supply in global markets. The Indian basket of crude oil has fallen consistently from $115 a barrel in mid-June to $95.5 a barrel on Monday. The diesel price is determined from the refinery gate price, based on trade parity pricing, computed as a weighted average of the import parity price (with a weight of 80 per cent) and export parity price (20 per cent weight).

The retail price is currently worked out on the basis of the daily FOB quotes of Arab Gulf prices as published by Platts & Argus. The retail price has risen by a cumulative Rs 11.82 a litre since January 2013, in 19 instalments since then. However, with state Assembly elections in four states round the corner, the government is yet to decide on deregulation.

Reserve Bank governor Raghuram Rajan has asked the government to take advantage of the lower international crude prices to announce diesel price deregulation. “Typically, a lower oil price means a lower current account deficit, lower oil subsidies and lower inflation. We should take this moment to eliminate diesel subsidies as soon as possible,” he said on Monday.

Diesel accounted for 45 per cent of the OMCs’ gross underrecovery of Rs 1,39,869 crore on retail sale of subsidised products in 2013-14. This should be no more than Rs 19,584 crore in 2014-15. Diesel currently costs Rs 58.97 a litre in Delhi, Rs 67.26 in Mumbai, Rs 63.81 in Kolkata and Rs 62.92 in Chennai. The price differential between diesel and petrol has fallen below Rs 10 a litre, as the latter’s rates have been revised downwards thrice in the past two months.