Free pricing of petrol, diesel under consideration

The government has initiated work to free the pricing two of the four subsidised petroleum products -- petrol and diesel.

“Freeing pricing is under consideration,” said a senior petroleum ministry official.

While many officials feel that this would be an opportune time to move towards market-based pricing – since the price of petrol and diesel would actually come down by Rs 10 and Re 1, respectively with oil ruling at about $40 per barrel – there is no consensus on how the subsidy on the remaining two subsidised fuels – LPG and Kerosene – will be borne.

After the cut in the price of petrol and diesel last week, gross margin of the oil marketing companies on petrol is at Rs 10 per litre while for diesel it is Re 1 per litre. However, under-recovery on kerosene is Rs 17.26 per litre while on LPG, it is Rs 148.38 per cylinder.

“Daily under-recovery is about Rs 25 crore for us,” said a senior official of the Indian Oil Corporation (IOC), the country’s largest marketer and refiner, which accounts for about half the market. It is about Rs 50 crore for all the three marketing companies – IOC, Hindustan Petroleum and Bharat Petroleum.

Overall under-recoveries for the three companies for the current year are estimated to be Rs 110,000 crore.

“The key now is to arrive at a formula of addressing under-recoveries which is transparent and acceptable to all,” said another ministry official, adding that there is no estimate of how long the exercise could take.

“It could happen before elections... or could take longer,” the official said.

Since decisions on energy pricing have political ramifications, and are perceived to sway voters one way or the other, a final nod will have to come from the Cabinet.

“Freeing prices is a good idea. It is important that the companies are free to decide prices,” said B K Chaturvedi, member, Planning Commission who headed the high powered committee set up by the Prime Minister to look into the financial position of oil companies and to examine the options for subsidy burden sharing.

Last year, government shouldered about 50 per cent of the subsidy burden through oil bonds, upstream companies contributed 30 per cent and the rest was managed by the oil marketing companies themselves.

Both the upstream and downstream companies say they are not in a position to shoulder any additional burden.

Agency reports said controlled pricing would end if oil remains at around $45 till February.

The government had moved to market linked pricing in April 2002 but controls were brought in 2004 as crude oil prices increased.