Oil spill

If the continuing sabotage in Iraq and the terror attacks on US firms involved in oil production in Dhahran in Saudi Arabia weren't enough to give the oil market the jitters, the uncertainty over Russian oil giant Yukos (which produces over 2 per cent of global production and a fifth of Russia's output) is making things a lot worse.

Though the initial panic following the ban on Yukos' production is over, and the Russian justice ministry has lifted the freeze on some of the beleaguered company’s subsidiaries, few expect oil prices to settle below $42–43 per barrel over the six-month horizon.

Indeed, some even talk of a $45 price over the short term. For one, while Saudi Arabia has more excess capacity than Yukos’ production, there is doubt about the Saudi ability to hike production, especially with US firms still wary post-Dhahran, and with the anti-American mood that clearly persists in Iraq.

Two, the normal build-up of supplies for the winter that usually takes place between May and September is still to happen; average inventories in the US, for instance, are below normal levels.

Which is why oil futures were near a 21-year high towards the end of last week. While Dubai prices have gone up from $27 to $36 in the past one year, WTI crude has gone up from $32 to $43.

The immediate consequence for India is that the import bill for the year will go up a third to around $24–25 billion. As an inevitable corollary, domestic fuel prices will continue to climb, as they have done over the week-end.

Nevertheless, because of the government’s complicated price-fixing formula, the oil companies will have to absorb some of the hike. Two, the cushion that oil companies got by overcharging on petrol, which in turn helped them subsidise other products like LPG and kerosene, has got eroded to some degree—every dollar hike in global crude prices leads to a Rs 1,000-crore hike in the subsidy bill.

How exactly the new price-fixing formula will work in this context remains to be seen.

It remains a pity that complicated cross-subsidies will continue to make oil pricing a non-transparent game, which the government and the oil companies will continue to exploit for their own ends.

The oil-marketing companies claim they are losing over Rs 8,000 crore a year on account of the subsidies, but it remains true that they are in turn over-charging consumers by amounts far larger than this.

By buying 30 million tonnes of crude from ONGC at $3 less than international prices, for instance, oil companies pocket $600 million on this score alone.

And the extra 10 per cent import duty protection on oil products means another $2 billion or so (since the “effective rate of protection” is actually many times the nominal rate, the additional money to the oil-marketing firms is much higher).

Of course, it’s not just the oil-marketing firms that are profiteering from the current system. For every litre of petrol that costs around Rs 16–17 per litre at the refinery, the governments (Centre and states) collect another Rs 20 or so through various imposts.

And each dollar increase in global prices nets the government Rs 250 crore more of customs revenue, Rs 600 crore of excise, and around Rs 800 crore of additional corporate taxes.

While this complicated web will probably ensure that Mr Chidambaram’s tax revenue targets will be met at the high oil prices that prevail, the reform that the oil sector needs is getting postponed.