It was yet another tough year for oil companies, especially when the Centre preferred populism over the transparent petroleum pricing and rational duty structure. Despite accepting the Rangarajan Committee report, which recommends shifting the basis of petrol and diesel pricing to trade parity instead of just import parity.

It is imperative for India to gradually move to a market-determined oil price mechanism, even while keeping the welfare considerations and the economic costs in mind. As long as international prices of oil are within a specific band the market forces should determine the price of petroleum products in the domestic market.

Any movement of international prices beyond the price band must have an automatic response on the price front, which is known in advance. In addition, the other damages being done to the fundamentals of the economy is the fact that owing to the recourse that the government takes to the debt market for financing oil deficits merely passes the liability on to future generations, which is economically and ethically incorrect.

The govt. reduced the petrol price by Rs 2 a litre and diesel by Re 1. This move, made in the wake of a reduction in global oil prices to $57 a barrel from $70 a barrel in August, has lowered the profit margins of oil companies. The last move, on June 5, was even more significant—Rs 4-a-litre reduction for petrol and Rs 2 for diesel. Upstream and downstream companies have had to implement the Centre’s decision and make another plea for ending the opaque pricing system. Despite this retrograde step, the petroleum and natural gas sector as a whole witnessed a slew of developments.

The State-owned oil marketing companies (OMCs) are in the process of returning the discount of about Rs 900 crore collected in the first half of the current fiscal to standalone private and public sector refiners. Standalone private and PSU refiners were extending discounts on petroleum products - domestic liquefied petroleum gas and kerosene under the public distribution system sold by them to retailers to partially offset the under-realisation suffered by retailing companies.

Discounts to OMCs such as Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum have been discontinued with retrospective effect from April 1, 2006. The OMCs have now agreed to make payment of full refinery transfer prices towards sale of LPG and kerosene with effect from April 1 without deducting any discounts, official sources said. The annualized amount to be returned to standalone refiners would work out to about Rs 2,000 crore, sources said.

With the recent Government decision, it has become imperative for OMCs to refund the amount for the first two quarters of the fiscal to standalone refiners such as Mangalore Refinery and Petrochemicals Ltd (MRPL), Chennai Petroleum Corporation Ltd (CPCL), Reliance Industries Ltd (RIL), Numaligarh Refinery (NRL) and Kochi Refineries. Of the estimated Rs 900 crore, the amount to be returned to RIL was close to Rs 320 crore, CPCL (Rs 110 crore), MRPL (Rs 142.88 crore), Bongaigon Refinery and Petrochemicals Ltd (Rs 40 crore), and the rest to the refineries of Indian Oil, Hindustan Petroleum, and Bharat Petroleum among others.

Currently, OMCs are suffering an under-recovery of Rs 132 per cylinder on cooking gas and Rs 13.81 per litre on kerosene.With RIL declining to extend any discounts for the current fiscal, MRPL had approached the Petroleum Ministry seeking level-playing field on the issue. The Petroleum Ministry, after considering MRPL’s request, felt that the standalone refiner could seek refund of discounts on LPG and kerosene from retailing oil companies with effect from April 1.

The current reduction in prices might help in containing headline inflation within the 5.5% to 5.7% level by year-end. Therefore, as a short term measure the price reduction would be welcome by the user community. However, this should not detract us from the objective of letting market forces have a greater role in the pricing of oil. Our focus should also remain on subsidies in LPG and Kerosene, which need rationalisation urgently. This needs to be part of the larger fiscal exercise in oil, where what needs to be done is to follow the Rangarajan Committee Report and adopt the formula for changing over to trade parity prices and rationalise state taxes. Government should make all oil products VATable and switch over to GST by 2010 said.