Sunil Jain: Crude calculus

PERSPECTIVES

The good news is that, despite the recent price cuts, the net losses for the state-owned oil marketing companies have come down dramatically. In the second half of this year, gross under-recoveries expected to be around Rs 3,600 crore as compared to Rs 93,000 crore in the first half. In 2009-10, according to estimates made by Reliance Money, a Reliance Capital associate firm, if oil stabilises at $50 a barrel, gross losses should be around Rs 8,700 crore — since upstream firms like ONGC will be asked to share the burden as well, the net under-recoveries will be of the order of around Rs 5,800 crore.

Assuming modest net refining margins of $2 a barrel, however, oil marketing firms could post operating profits which will offset the under-recoveries and so they may not need any government assistance in the form of bonds. If the global recession continues, and oil prices fall to $40, say, the oil marketing firms will make huge profits as working capital requirements will decline. Just how huge will depend upon the exchange rate, and Reliance Money has created a crude calculus, as it were.
   

Don’t toil over oil 2009-10 estimates of under-recoveries (Rs ‘000 cr) at various levels of oil prices
		Oil prices in $ per barrel

4045505560 Exchange 
rate 
(Rs per$)4330.7015.400.10-15.20-30.50 4427.0011.30-4.30-20.00-35.60 4523.307.30-8.70-24.70-40.70 4619.703.30-13.00-29.40-45.80 4716.00-0.70-17.40-34.10-50.90 4812.40-4.70-21.80-38.90-55.90 Source: Reliance Money Research

If oil is at $45 to the barrel and the rupee is also at 45, for instance, the oil firms stand to make profits of Rs 7,300 crore. Chances are, though, that the government will lower retail prices by a greater degree — in which case, none of the calculations will hold!