Fuel subsidy seen at Rs 300,000 cr

The northward march of crude oil prices has led to fears that the fuel subsidy bill could balloon to Rs 300,000 crore this year. This could cover the Centre's projected fiscal deficit of Rs 133,000 crore for 2008-09 two times over and still have a good amount left.

Earlier this month, the petroleum ministry had estimated the fuel subsidy at Rs 245,000 crore for the year on the assumption that the price of the basket of crude oil that Indian refiners buy would be $123 per barrel.

With crude oil soaring to $142 a barrel today, this estimate will soon have to be revised sharply upwards. The price of the Indian basket is already close to $132 a barrel and the current spike will only make it more expensive. The Indian basket trails the global price by around $3 per barrel.

"Given the rate at which oil prices are increasing, it may be just a couple of months before the annual under-realisation touches Rs 300,000 crore," said a senior official of state-owned Indian Oil Corporation (IOC), which sells half the fuels the country consumes. "We are not very far away from that mark," he added. 
 

THE OIL EQUATION
Price of Indian oil basket when fuel prices were hiked	123.00
Price of Indian oil basket on Thursday	131.64
Highest-ever price of Indian oil basket (June 25)	132.77
Average price difference between Brent crude oil and Indian oil basket	3.00
(Figures in $/barrel)

All state-owned oil marketing companies "� IOC, Bharat Petroleum and Hindustan Petroleum "� have been selling petrol, diesel, cooking gas and kerosene at a huge discount. As a result, they have huge under-recoveries, which they are supposed to share equally with the government and the upstream public sector oil producing companies.

The retail price hike and the duty cuts announced on June 4 had tempered the subsidy burden by about Rs 40,000 crore but "the positive impact of the fuel price increase and duty cut will possibly be wiped out next month when the numbers are redone," said the IOC official.

Experts said that the thumb rule is that every $1 increase in the price of the basket adds Rs 3,000 crore to the subsidy bill.

The companies themselves do not see oil prices falling in the near future. "Oil prices at $200 per barrel cannot be ruled out," said RS Sharma, the chairman and managing director of Oil and Natural Gas Corporation, the country's largest oil exploration company.

An official with Reliance Industries, which runs the world's sixth largest oil refinery at Jamnagar in Gujarat, said "Oil prices will only go up from here in the short-to medium-term".

President of the Organisation of Petroleum Exporting Countries Chakib Khelil said on Thursday oil prices would increase to $170 per barrel this year due to a weak dollar and geopolitical unrest.