Is economics determining pricing of petrol, diesel after elections?


Is economics determining pricing of petrol, diesel after elections?

New Delhi: As the polling for the 17th Lok Sabha came to an end on 19 May, the state owned companies started increasing fuel prices. Interestingly, the diesel and petrol retail prices in the country remained subdued when the general elections were on.

While the prices remained stagnant on Wednesday, the price of petrol has risen by 83 paise per litre over the nine days since 20 May and diesel by 73 paise, newswire agency PTI reported. Retail prices of petrol and diesel in India track the global prices of these auto fuels, not crude, although they are broadly linked to crude oil price trends.

This comes in the backdrop of India trying to line up supply alternatives in the wake of US sanctions on Iran. President Donald Trump pulling US out of a 2015 historic accord with energy rich Iran that was linked to curb the Islamic Republic’s nuclear programme in return for ending sanctions. Also, there has been a sharp spike in international crude oil prices due to a combination of factors such as Opec and Russia cutting supplies, falling production in Venezuela and geopolitical tensions.

India’s three government-run oil marketing companies Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) had also refrained from raising prices while the Karnataka poll campaign was on.

In response to a Mint query, Indian Oil Corporation chairman Sanjiv Singh on 17 May denied any correlation between elections and transportation fuel price freeze.

The government has maintained that it has got no role in pricing since India’s three government-run oil marketing companies introduced dynamic fuel pricing, joining countries such as the US and Australia, where fuel prices change daily depending on global oil price fluctuations.

The cost of the Indian basket of crude, which averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, rose to an average of $71 in April 2019, according to data from the Petroleum Planning and Analysis Cell (PPAC). The price was $68.91 a barrel on 28 May. The Indian basket represents the average of Oman, Dubai and Brent crude.

Analysts say that the thinner spreads and rising under-recoveries are expected to shave the operating profit margins of oil marketing companies (OMCs) by 150-170 basis points (bps) this fiscal, even as crude prices remain elevated and volatile.

“We also foresee net profit margins coming under pressure because of higher interest costs. OMCs have had to contract 22% more short-term debt last fiscal because of inadequate payments from the government, and also to service under-recoveries of the recent past,” said Prasad Koparkar, senior director, CRISIL Research in a statement.

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