Oil Import Cost Hits Record 7,000/bbl

Falling rupee, rising crude set to escalate PSU oilcos’ losses as well as the budget deficit

In a double whammy, a depreciating rupee and rising international crude oil prices have taken India’s cost of importing oil beyond a historic high of . 7,000 per barrel. This is bound to increase losses at public sector oil companies as well as further bloat the government’s budget deficit, which is already at unsustainable levels, unless diesel prices are revised upwards.
A barrel of crude oil, which India imported for . 5,500 per barrel in April 2013, now costs 27% more to over . 7,000/barrel, in August. The increase is due to a combination of factors — a 7% rise in international crude oil prices and a 19% decline of the rupee against the US dollar. Needless to mention, this has put enormous pressure on India’s current account deficit — nearly 80% of India’s oil is imported — as also fiscal deficit — since the government pays for keeping domestic retail prices artificially low.
The situation is bad for the public sector oil companies. The three oil marketing companies — Indian Oil, BPCL and HPCL — would have incurred a combined loss of . 3.38 lakh crore in the past three fiscals, had they not been compensated by the government and upstream companies, informed P Lakshmi, minister of state for petroleum in Rajya Sabha on August 27. The government paid two-thirds of this or nearly . 2.25 lakh crore.
In the April- June 2013 quarter, the three OMCs have lost . 27,638 crore, when the average crude oil import price was . 5,665 per barrel. If the crude oil prices were to stay above . 7,000 per barrel for the rest of the fiscal, other things being equal, the under-recovery bill could rise to . 1,30,000 crore for FY14.
The Union Budget for 2013-14 provides . 65,000 crore as under-recovery compensation to the oil PSUs. Out of this, . 18,000 crore are expected to go towards short provisioning of previous year. As a result, the rising oil prices could raise budget provisions by . 31,000 crore assuming the government will fund 60% of the total under-recoveries.
Media reports suggest the government is mulling an over a . 5-a litre increase in diesel prices. However unpalatable it may be politically, this could prove a welcome move for the industry as well as the economy, since at 45% of total petroleum consumption, diesel is the largest consumed product in the country.