India's petro pricing policy causing adulteration: Energy watchdog

India's pricing policies for petroleum products "" end-user price caps "" are increasingly causing "oil product adulteration" and "pollution" in addition to severe imbalances in demand and supply for oil products as well as rising subsidy bill and heavy financial losses by refineries, said Paris-based International Energy Agency (IEA) yesterday.

Issuing its monthly report, IEA said India's overall demand for petroleum products is expected to grow at 4.8 per cent this year with an overall demand at 2.9 million barrels per day (mb/d) as against last year. Transportation fuels like gasoline, jet fuel/kerosene and gasoil sales are the chief contributors to demand growth.

IEA has cut its oil product growth forecasts for this year to 1.2 per cent, or one million barrels a day, from 1.5 per cent last month. It hinted at more cuts in the coming months. Demand for oil products would hover around 86.8 mb/d as against 87.2 mb/d forecast in last month's report, according to IEA which advises 27 oil consuming countries.

It predicted slower growth for petroleum products in the United States and other major industrialised countries. IEA's report caused oil prices to fall below $124 on Tuesday, analysts said.

Expressing sharp concern over India's pricing policies for petroleum products, the agency argued "one effect of India's end-user price caps "" in addition to runaway demand, mounting government expenditures and the heavy financial losses incurred by refiners and retailers "" is oil product adulteration."

The agency pointed that the "adulteration" has to happen due to widespread differences between administered prices for kerosene (which is sold at Rs 9 per litre) and gasoline (petrol at Rs 44 per litre, or diesel at Rs 36 a litre). Consequently, "as much as 50 per cent of kerosene is diverted for illegal blending, according to local estimates," it added.

More disturbingly, "the subsidy policy is in effect financing a massive transfer of wealth to the growing black market (in petroleum products)," it concluded.

India spent about $19 billion on fuel subsidies last year, with kerosene claiming about $4.8 billion. Besides, cheap kerosene is also exempted from local taxes resulting in a net loss of revenue to the tune of $4 billion.

Further, the cheap kerosene pricing structure is finally contributing to growing air pollution as "Indian kerosene contains as much as 2,000 ppm of sulphur "" around six times higher than diesel in major cities (350)," IEA warned.

With demand for petroleum products growing in China, the Middle East, and India, "it would seem that the risks to demand remain on the downside." "While consumers may be adjusting to high oil prices, the full impact of current high oil prices in excess of $120/bpd, if sustained, has yet to be factored into behaviour or forecasts," the agency added.