Fuel price cutback on the agenda

With international crude oil prices dipping to last year’s levels, the government has put the issue of cutting motor and cooking fuel prices back on the agenda to tame inflation, two senior oil ministry officials have said.

“Oil prices are down, and it’s a perfect time to cut fuel prices,” said an official in the petroleum ministry, who did not want to be named. “The elections are approaching and a fuel price cut not only brings down inflation but is also popular with the people.”

The Election Commission has also announced elections in six states at the end of November and general elections around six months away.

However, the trigger for a price cut has been recalibrated. The oil ministry had earlier claimed that the oil companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum — would not incur losses selling petroleum products if crude prices touched $67 a barrel. The Indian basket of crude oil, which is used by domestic refineries, fell to $68 a barrel on Wednesday, the latest day for which data were available.

But with the rupee depreciating 10 per cent in the last quarter, import costs have risen sharply causing the ministry to revise the break-even point to $61 a barrel.

Analysts project oil prices to fall to $55 per barrel in the short-term as demand erodes in a slowing economy. Prices are around 13 per cent lower than they were in October 2007.

When contacted, Petroleum Minister Murli Deora said lower oil prices are welcome and the government is closely watching the price movements.

Government officials say even a Rs 2 to Rs 3 per litre cut in diesel prices would bring down inflation 60 to 70 basis points (100 basis points is equal to one percentage point). Inflation for the week ended October 4 was 11.44 per cent.

Oil companies currently make profits on a third of their petrol sales. The companies sell premium petrol and diesel around Rs 4 per litre higher than normal petrol and diesel. These firms lose around Rs 2.85 on every litre of normal petrol and Rs 7.26 on every litre of normal diesel they sell.