Consumer in India may not be feeling the heat from rising oil prices, but oil companies and the Government of India have certainly been singed—BPCL and IOC have lost 15 and 12 percent of their market-cap in the last one month, while the Sensex gained over 7 percent in the same period.
Now, with expectations of crude reaching the astronomical level of $200 per barrel internationally, coupled with the inability of the government to align domestic prices with international ones, oil-marketing companies and government finances are expected to remain under considerable stress going forward.
On the fundamental side, Minister of State for Petroleum & Natural Gas informed Parliament on 6 May 2008 that the gross under-recoveries of the public sector oil marketing companies on the sale of petroleum products i.e. petrol, diesel, PDS kerosene and domestic LPG for the year 2007-08 are estimated to be approximately Rs.77, 303 crore.
This figure may go up substantially this year. According to estimates, net oil imports have risen to 4.5 per cent of the GDP compared to 2.87 per cent in 2004. Also, the rising trade deficit will further put pressure on Indian rupee to depreciate, and the weakening rupee will further add to the under-recoveries for oil companies. Apart from oil companies, this will also deeply affect the government finances as it partially fills the under-recoveries with oil bonds.
The government will be certainly reluctant to hike prices of petroleum products as within 12 months both crucial assembly and general elections are to happen. With the government already fighting the big inflation war, this acquires a ‘Mission Impossible’-kind of mien. The only thing that can transform the situation in a way to make for a ‘Mission Possible’ is a very sharp correction in oil prices. This will not only save the oil companies, but also the government.
However, oil experts across the globe feel its unlikely that oil will correct sharply. Only a big recession can pull oil down. The days of cheap oil are over, as the cost of extraction itself is going up substantially and output is declining. Russia, for example, which accounted for about 80 percent of growth outside the OPEC countries, is witnessing a decline in output and production is falling since last four months constantly. So, apart from geo-political tension, there are economic reasons pushing oil prices.
Its necessary to take this threat seriously and necessary indeed is an action plan—drawn within time, or, otherwise, the government along with oil companies may face some serious and irreversible consequences.
Rohit
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