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www.petrofed.org In the long term interest of the Indian economy, the principle rule and allow the prices to be regulated Petroleum Federation of India circulated this by competition so that consumers are not thought leadership paper on January 15, 2009 burdened unduly. during the Petrotech-2009 international oil & gas conference & exhibition advocating market The good times have arrived – crude oil prices determined prices for petroleum products for have plummeted and reached a four year low. healthy growth of the industry. Private oil companies have begun to restart the retail operations they had closed down. Most - Editor importantly, soon there would be a newly elected Executive Summary Strike when the Iron Is Hot… A Thought Leadership Paper by Petrofed 26 government at the centre with a fresh mandate from the public. It may not be compelled to take populist decisions. Election manifestos will be Over the past four years and till few months back, drafted soon; the petroleum sector and the high crude prices caused mayhem. Economies stakeholders would like political parties to spell were threatened and oil importing countries had out their plans on petroleum product pricing serious cause for worry when Big Oil and oil policy. exporting countries were rejoicing. At home, public oil marketing companies reported losses The Integrated Energy Policy also advocates even in the third quarter and some are expected to rationalisation of fuel prices. The policy return losses for the fiscal on account of controlled recommends that, as a general rule, all transport fuel prices, a paradox of purpose when commercial primary energy sources must be world-wide profits of oil majors have jumped priced at trade parity prices at the point of sale, several fold. The companies had borne very high namely the Free-on-Board (FOB) price for levels of under-recoveries, and now need to products for which the country is a net exporter regain their financial strength by avoiding making and Cost, Insurance and Freight (CIF) price for any losses during higher crude prices scenario in which it is a net importer. The policy projects that future. The future of marketing companies is at the price of a product for which the country is self stake. sufficient in a competitive market with many suppliers and buyers would fluctuate between the At the national level, oil bonds, fertilizer bonds two depending upon the ease of import/ export and subsidies in the two sectors weakened the and reliability of supplies. This principle, the Government finances. Trade and fiscal balances policy claims, is extremely relevant for the have been affected severely with high crude prices petroleum sector wherein bulk of the crude oil is in the past four years. imported and India has become a net exporter of petroleum products. The consumers will continue to be burdened in such scenarios if true competition does not set-in The policy goes further to recommend to cushion within the Indian retail petroleum sector. domestic prices against short-term volatility of prices on the international market (FOB or CIF) Steps to reduce transport fuel price on December domestic prices by setting on the basis of median 6th and the temptation to further reduce them, prices over the previous month or a three month although may appear rational in the current low period. In conclusion the policy suggests that crude oil price scenario, are devoid of a lasting instead of administering prices, full price solution. competition should be introduced. Commodity markets are cyclic. Petroleum industry To start, decontrolling the prices by linking them to is no exception to this. Crude prices may go up in Trade Parity Price for all – PSU as well as Private Oil the future and difficult times would start again. Marketing companies – and providing subsidy to Political compulsions will never allow the burdens needy at the consumer end, would be in line with to be passed on deliberately. The debate over recommendation of the IEP 2006 which was how much to pay oil companies to make up for recently approved by the Union Cabinet. under-recoveries would never end, and as a result oil companies would stand to lose. Why not allow For the fear of consumers getting unduly competition to rule? Let the 'consumer pays' burdened disallowing the above actions would be
27 www.petrofed.org a script for failure on many accounts; failures we • Decontrol transport fuel prices, and were saved just when situation was getting out of control. That was owing to global drop in crude oil price, not our action. Hence, let the failures not • Let deserving domestic consumers receive subsidies instead of suppliers. wait round the corner. In case a similar very high crude price scenario Do not wait. Strike while the iron is hot …… emerges again, the Government can, as an exception and not as a rule, cap the burden on Here is an opportunity to take actions which, in all probability, find the solution to almost all related consumer and share the rest through fiscal or subsidy mechanism in future. problems – Let the opportunity not go waste. ($/bbl) 140 120 100 80 60 40 20 0 Apri l Absorbing Volatility in Crude Oil Prices not Planned Crude oil prices have displayed extreme volatility posed by the actual operation of the domestic in the last four years with NYMEX crude oil prices pricing policy of petroleum products, besides climbing from $37/bbl in April 2004 to $147/bbl making the domestic economy more vulnerable to in July 2008 and then tumbling to below $60/bbl oil price shocks due to higher degree of oil import mark within a span of three months. The average dependence. Despite the dismantling of the APM price of an Indian basket of crude oil has exhibited regime, the Public Sector Oil Marketing a whopping increase of 309 percent between April Companies (OMCs) have not yet been granted 2004 and July 2008. This upward surge in crude freedom to revise the prices of the major oil prices reversed with the prices falling to petroleum products such as petrol, diesel, $55/bbl in November 2008. kerosene and LPG, which account for more than 60 per cent of the total consumption of petroleum The erratic movement in global crude oil prices products, in tandem with international crude oil cannot be explained merely by the dynamics of price movements. demand and supply. Other variables such as currency movement, speculations, sufficiency and While average price of Indian basket of crude oil security, geopolitical tension and even the macro- increased by 309 percent between April 2004 and economic situation in countries like USA also July 2008, the retail selling prices of diesel were contribute to international crude oil price increased by only 60 percent and that of gasoline movement. It is therefore best to plan for volatility by 50 percent for the corresponding period, in prices, rather than be reticent about low prices. resulting in a low degree of price pass-through. The price pass-through ratios for gasoline and As India imports more than 70 percent of its crude diesel for the period between 2004 and July 2008 oil requirement, these cyclic movements in were 0.16 and 0.19 respectively. This clearly international oil prices bring to the fore challenges indicates that decontrolling prices of petroleum Figure 1: Trends in Monthly International prices of Indian basket of crude oil May Trends in Monthly International prices of Indian Basket of crude oil June July August September October November December Source: PPAC-Oil Prices and Taxes, GoI (2008) y Januar February March FY 2009 FY 2008 FY2007 FY 2006 FY 2005
Page 1 and 2: PetroFed THE JOURNAL OF PETROLEUM F
Page 3 and 4: As I sit down to pen this piece, th
Page 5 and 6: India-The Energy Scenario Refining
Page 7 and 8: 5 www.petrofed.org Yield and Produc
Page 9 and 10: 7 www.petrofed.org offers potential
Page 11 and 12: Bob MacKnight Lead Analyst, PFC Ene
Page 13 and 14: Rajiv Puri Associate Director, Advi
Page 15 and 16: Dr. Siddhartha Mukherjee Group Lead
Page 17 and 18: 15 www.petrofed.org pass liquid. pe
Page 19 and 20: Big deals in retreat Gas grabs top
Page 21 and 22: Australia & Asia-Pacific 19 www.pet
Page 23 and 24: 21 www.petrofed.org • Project Sco
Page 25 and 26: 23 www.petrofed.org means of excell
Page 27: 25 www.petrofed.org reboiler for an
Page 31 and 32: 29 www.petrofed.org and Hindustan P
Page 33 and 34: 31 www.petrofed.org Payments situat
Page 35 and 36: Ghana, Indonesia and Jordan all rec
Page 37 and 38: 35 www.petrofed.org The PetroFed pa
Page 39 and 40: "Energy and Climate Summit" (L-R):
Page 41 and 42: Mr. Amit Yadav, Director, Departmen
Page 43 and 44: Mr L N Gupta, Jt. Secretary, MoPNG
Page 45 and 46: Session Chairman Mr. Suresh Mathur,
Page 47 and 48: Mr. S. Behuria Chairman Chairman, I

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