The Centre deregulating diesel comes at an opportune moment when international crude oil prices are trending down.
The deregulation is happening nearly two decades after a Government-nominated panel under a former BPCL chief, U Sundararajan, first advocated freeing fuel prices at one ago. In 2002, the Vajpayee-led NDA Government gave the go-ahead to free petrol and diesel prices, but the UPA regime did a U-turn when it took charge two years later.
Petrol prices were finally deregulated in 2010 and the transition to market prices has been working well.
Now, with diesel also freed from control, the oil companies will be hoping that global crude prices continue to be benign in the months to come.
On Saturday, they slashed diesel prices by ₹3.37/litre and this trend could continue each fortnight so long as global crude prices are in free fall mode.
But many experts feel crude prices will reverse direction sooner or later. According to them, the era of cheap crude (read, under $50/barrel) is long gone. Going forward, there is a strong possibility of prices climbing to $90 and even breaching the $100-mark in a year.
The challenge for the Government is to stick to its guns and not roll back the critical fuel price reform whatever the political pressure. Over the last seven years, since crude oil began its dramatic climb, public sector oil companies — IOC, HPCL and BPCL — have seen their combined borrowings exceed ₹100,000 crore.
Since 2008, when crude oil prices touched nearly $150 a barrel, diesel has been the biggest bugbear for these companies with their retail losses averaging ₹50,000 crore annually.
Subsidised gas These would eventually be squared up in a Government-formulated compensation mechanism but till then the oil companies had their backs to the wall as borrowings soared. Thanks to the monthly price hikes of 50 paise and the fall in global prices, diesel losses have been wiped out. Now, the oil companies need only to contend with losses incurred on subsidised cooking gas and kerosene.
These should hopefully be in the range of ₹40,000 crore annually, a steep fall from ₹140,000 crore last fiscal.
The losses made on subsidising fuel were a huge impediment to the oil companies’ investment plans in refineries, pipelines, terminals and retail outlets. The trio has earmarked over ₹150,000 crore for these projects over the next three years to ensure fuel supplies across the country.
Retail challenge With diesel deregulated, it is only a matter of time before private players like Reliance and Essar revive their fuel retail business. They had kept out of the game because the subsidised regime was not viable. As a result, the arena is going to become more competitive which means the public sector oil firms will have their work cut out. But with nearly 50,000 outlets between them, they are more than ready for the challenge.