Will Petrol Prices Cross The Rs. 100 A Litre Mark?

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Too many people have slipped while trying to predict oil prices. From where we stand now, it is unlikely that petrol prices will reach Rs. 100/litre anytime in the next four or five years.

The situation could change if the government takes the drastic measure of de-controlling diesel prices. Diesel is currently subsidised and the price is artificially kept lower than petrol. It is unlikely that such a step will be taken, because the Indian economy moves on diesel trucks. If the prices are not controlled, they will move up sharply and this will have a cascading impact on the price of almost every other commodity. This will also impact petrol prices — a whole lot of diesel users will switch to petrol, because it will be cheaper to buy.

Today, the situation is quite the reverse. Because of the price difference between the two fuels, there is a big shift from petrol to diesel vehicles (cars). The subsidy on diesel is targeted mainly at truckers and not at passenger vehicles. To arrest this shift, the government is planning to tinker with duties on automobiles to make diesel cars more expensive. But elections are not far, and this will be a difficult one to push through.

However, at present, we are in a rare situation where international petrol prices are lower than crude oil. As you know, petrol is made by refining crude oil and hence its price is (and logically should be) higher than crude. But right now the situation is the reverse. International demand for petrol has tanked because of the slowdown in the US and the Eurozone countries.

So, there are two aspects to petrol prices — one is the situation in India with respect to taxes and the pricing strategy of the oil companies. The other is international prices — which vary according to global demand and supply. I will deal with these separately.

Unlike diesel, LPG and kerosene, which are price-controlled products in India, the price of petrol is free. The three oil companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum, who control the market, are free to change the price every fortnight. They benchmark the price based on international prices during the period. Now, I am often asked how free we really are. The answer is that we have the ability to price petrol, but we do consult the government. This is because fuel prices have a huge impact on the economy and, of course, the government is our principle stakeholder.
 
In India, petrol demand has been very robust in the past one year. It is linked to automobile sales, which is booming. Overall, fuel sales are growing at 6-7 percent this year. On the international front, the picture is not so rosy. Consumption in  developed economies is stagnant, leading to huge stocks, and prices are depressed. So, it’s unlikely prices will go anywhere close to Rs. 100 in the near future. If the global economies recover, it’s likely to harden marginally compared to the present.

R. K. Singh is the chairman and managing director of Bharat Petroleum (BPCL), the second largest fuel refiner and retailer in India.

(As told to Cuckoo Paul)