Budget: OMCs likely to set prices till crude oil stays below $75/barrel

NEW DELHI: Budget 2009-10, that is expected to flag off some of UPA government���s big ticket reform programmes, may include a roadmap for decontrolling fuel prices in the country. This policy statement would thus set the agenda of how oil companies would be allowed to fix retail prices of at least autofuel, petrol and diesel in a phased decontrol programme, a senior government official working on the reform policy told ET.

What is being suggested is that oil companies ��� IOC, HPCL and BPCL ��� that now sell fuel at government controlled prices, will have the freedom to price the fuel within a certain band. But if crude oil moves up beyond a level (recommended lebel of $75 a barrel) the government would step in with controlled prices at the pump level to protect consumers from the impact of high global prices.

If the policy move finds a political consensus among UPA alliance partners, this would ensure some pricing freedom for the oilcos albeit in a limited way. Government oil companies have had to be bailed out after taking huge hits on their margins and bottomlines as they sold most of the fuel at government controlled prices, much lower than the cost of production.

For consumers, the partial price decontrol would mean buying fuel at prices closer to global levels which would vary as global prices move up and down. While upstream oil companies like ONGC would be relieved from some part of the subsidy burden (as subsidies go down) private oil marketing companies Reliance, Essar and Shell may fid it feasible to remain in the market instead of shutting shop after investing in the retail infrastructure.

Oil companies, however, may not be allowed to increase retail prices beyond 15-20% at one go. The frequency of price revision will also be specified and in all likelihood the exercise will be undertaken once in a fortnight. If prices are indeed deregulated in the current market, prices of petrol could go up by Rs 5.10 a litre and diesel by Rs 2.60 a litre.

Officials in the ministries of finance and petroleum, have deliberated the issue on Wednesday in the North Block.

"The government is considering to deregulate auto fuel prices due to mounting subsidy bills. It has been compensating state-owned OMCs for selling fuels often below the cost through oil bonds. But this is not sustainable," another official in the government said requesting anonymity.

The government had to issue over Rs 71,000 crore oil bonds in 2008-09, a jump of over 100% from the previous financial year, to compensate the revenue loss state-owned OMCs for selling fuel below the cost. Total revenue loss of these companies also jumped by about 34% at around Rs 103,000 crore in FY09 and the upstream companies had to fill the gap of about Rs 32,000 crore to save these oil companies.

While the government will distance themselves from fixing retail auto fuel prices, they will continue to have a say in fixing prices of cooking fuels - domestic liquefied petroleum gas (LPG) and kerosene-sold through government-owned shops that cater mainly to the poor.