Financial Daily from THE HINDU group of publications
Friday, Mar 21, 2003
Financial Daily from THE HINDU group of publications Friday, Mar 21, 2003 |
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Industry & Economy
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Petroleum Soft crude may not help consumers Our Bureau
NEW DELHI, March 20 MARKET expectations of a `quick and decisive' war in Iraq has led to a sharp reduction in international crude prices to around $26 per barrel from $33-34 till a week back. But this softening trend need not translate into immediate good news for the consumer here. The reason: the reluctance of public sector oil marketing companies to cut prices, given that they actually stand to lose in the current scenario of falling crude and product prices. The petrol, diesel, LPG or kerosene that the oil companies sell today are processed from crude procured 45 days earlier (when prices were higher). The companies are, however, compensated at prices prevailing at the time of product sale. Hence, when global product prices - which are generally in tandem with crude prices - go down, the integrated refining and marketing companies lose. On the same principle, with rising global prices over the last year, the oil companies made profits only to be offset by losses incurred on sale of LPG and kerosene the prices of which have been kept artificially low on account of political compulsions. Further, in anticipation of the war, the oil companies have been operating at higher inventory levels of around 45 days, as against an optimum of 15 days, over the last few months. Since crude purchase for this inventory was contracted at over $30 per barrel, the oil companies will incur losses once they return to their normal operating levels of around 15 days. Hence, the integrated refining and marketing companies are unlikely to pass on the entire benefit of falling international crude and product prices to the consumer now. Moreover, even the current trend of falling prices is contingent upon the war not dragging on for long. A prolonged war situation - including possible damage caused to oil wells in Iraq or neighbouring Kuwait - could well reverse the current softening trend, which means that prices could once again breach the psychological $30 per barrel mark. That would frustrate any hopes of a price cut for consumers, unless, of course the Finance Ministry decides to bring down customs and excise duties on petro products to offset the impact of hardening global prices. Government officials maintain that the outbreak of war will not disrupt supply of petroleum products to consumers, considering that oil companies have inventories to sustain supplies for at least two months. At a meeting on Thursday convened by the Petroleum Secretary, Mr B.K. Chaturvedi, it was decided that the refineries will not shut down for routine maintenance over the next four months.
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