Petrol price hike to benefit OMCs | petrol price hike

CRISIL Research has come out with its report on petrol price hike. As per the research firm price hike will benefit to OMCs.

The oil marketing companies (OMCs) have increased the retail selling price of petrol by Rs 7.5 per litre with effect from May 23, 2012, taking the per litre price of petrol to Rs 78.6 (Mumbai).

While this price hike will not help reduce subsidy burden or fiscal deficit as petrol is already deregulated (the government does not bear a share of the under-recoveries on petrol), it will benefit the OMCs as they will not incur losses on the sale of petrol.

Since the deregulation of petrol in June 2010, the OMCs have regularly revised the domestic prices to reflect international product price movements. However, the significant increase in international crude prices and the sharp depreciation in the Indian Rupee vis-à-vis the US dollar seen since December 2011 had resulted in a sharp increase in the crude procurement cost of OMCs.

The OMCs had not revised the prices upwards, which led to losses of Rs 49 billion arising from the sale of petrol in 2011-12.

Assuming crude oil prices remain in the range of $107-112 per barrel and the rupee at an average Rs 51 to the dollar during 2012-13, CRISIL Research believes that the OMCs will not incur further losses on the sale of petrol during the year. However, in the event of a reversal in price hike, the OMCs are likely to incur annual losses of Rs 16-17 billion for every Re 1 per litre rolled back.

The current round of price hike has however spared the regulated fuels (diesel, kerosene and LPG).
Ballooning under-recoveries on regulated fuels to impact fiscal deficit adversely….

In 2011-12, the under-recoveries on the sale of regulated fuels increased by 80 per cent over the previous year to Rs 1.38 trillion. Of this, the government has agreed to bear the larger share of Rs 835 billion leaving the balance Rs 550 billion to be borne by the upstream oil companies. Of its share of Rs 835 billion, the government has already provided for Rs 450 billion in 2011-12. The balance Rs 385 billion is proposed to be paid in 2012-13. Although the government had made a provision for Rs 436 billion towards oil subsidies for 2012-13, the provision will be more or less used up for the payment of the 2011-12 subsidies.

Price hike to have a marginally negative impact on car demand; increase dieselisation

In March 2012, CRISIL Research forecasted passenger car demand to grow at 10-13 per cent in 2012-13. This forecast assumed an increase of Rs.4-5 per litre in petrol prices. However, the higher-than-expected price hike of Rs 7.5 per litre will negatively impact consumer sentiments leading to deferment of purchases especially in the small car segment. Consequently, CRISIL Research expects passenger car demand to grow at 10 per cent in 2012-13.

With a further widening in the prices of petrol and diesel, we expect passenger car demand to drift further in favour of diesel vehicles. Based on our estimates of current diesel engine capacities, the proportion of diesel cars sold is expected to increase to 42-43 per cent in 2012-13 from around 39-40 per cent in 2011-12.