The higher subsidy payout by the upstream oil companies for 2010-11 was inevitable given the precarious financial situation of their downstream counterparts.

This is also not for the first time that this has happened. In 2008-09, better remembered as the year when crude prices touched an all-time high of $147 a barrel, the upstream sector coughed up Rs 943 crore in the last quarter to ensure that one of the refiners did not sink into the red.

The following fiscal was a lot easier to handle since crude prices had cooled off considerably. The Centre then decided that ONGC, Oil India and GAIL would only take care of diesel and petrol losses, while it would personally make good cooking gas and kerosene (losses).

When crude prices started rising again in 2010-11, the upstream combine was directed to bear a third of the fuel losses which have since shot up to nearly 39 per cent. While this unfair treatment has become the talking point in oil industry circles, it is not as if IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are having it easy.

On the contrary, it has been a nightmare for the refining trio to commit investments when their combined borrowings are nearly Rs 15,000 crore a month.

If 2010-11 will be remembered as the year of soaking the upstream sector, things are just going to get a lot more difficult in the current fiscal with losses on diesel, cooking gas and kerosene projected to reach Rs 181,000 crore.

Even if the one-thirds formula is applied, ONGC and its upstream counterparts will have to make good at least Rs 60,000 crore, assuming that there will be no price hikes through the year. Clearly, this is a suicidal proposition except that the Centre just does not seem to have a clue on fixing a sound fuel pricing policy.

Way back in the 1990s, a committee headed by former BPCL Chairman and Managing Director, Mr U. Sundararajan, had advocated total deregulation of fuel prices. Naturally, this was unpalatable to the Government and even though successive expert committees warned of the perils of subsidised pricing, no action was taken.

At one level, there was no reason to press the panic button for over a decade because crude prices were largely benign till they showed their uglier side in 2008-09. “If that was an aberration, all of us are convinced that $100 a barrel is here to stay and could actually go higher in the coming years,” an oil sector executive said. The reluctance to hike prices has taken its toll on the companies as evident in the higher subsidy payout by the upstream sector and the wobbly balance sheets of IOC, HPCL and BPCL. The impact of cheaper fuel is best seen in the auto sector where demand for diesel cars has shot through the roof.

And why is this rampant consumption of diesel scary? Simply because its losses, at over Rs 15 a litre, are actually translating into annual losses of nearly Rs 1.2 lakh crore for the refiners. Hiking prices marginally by Rs 4 a litre will neither reduce its use in cars (or in other non-auto applications) nor help IOC, HPCL and BPCL wipe off their losses.

Inflation is, of course, cited as the reason for keeping diesel prices in check. Can pricey cars, therefore, continue to use cheap fuel?

Within oil industry circles, not everyone is convinced that total deregulation of diesel will be as catastrophic as believed since the inflation-linked goods carriers only account for a small portion of the transport segment.

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