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OIL PRICEOIL PRICEDEREGULATIONDEREGULATION

111 August 2010

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In troductio nGovernment of India deregulated the prices of petroleum products

Decision was taken on 25 June 2010 at EGOM (EmpoweredGroup of Ministers)

Decision was made on the basis of recommendation by Kirit

Parikh Committee

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The Big Rid e r T his is not the first attempt by the government to deregulate

petroleum product prices.

In April 2002, in an attempt to phase out subsidy on petroleum

products, the government dismantled the administered pricing

mechanism (APM) For pricing of Petrol an diesel

T o revise retail prices within a band of +/-10% of the mean of rolling

average of the last 12 months

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Rea so n s

1. T o reduce the losses of oil marketing companies which are

borne by:

y U pstream oil sector companies like ONGC, OIL INDIAy Government: By issuing bonds

y T he residual amount is borne by OMC like HPCL, BPCL, etc.

2. T o reduce competition, since private companies do not receivefinancial support.

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IMPAC T OF DEREG U LAT ION

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Imp act of D er egul a tio n

Increase in Prices

Inflation

Interest rate

Public Finance

Private players will re-emerge

Improve Valuation of OMC

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Increase In Prices:

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P roduct In cr ea s e in ` In cr ea s e in %

PE TROL 3.5/ ltr 6 .7

DIESE L 2 /ltr 5

LPG 35/ cyli n d e r 11 .2

KE RO SENE 3/ ltr 33.3 0

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Inflation

Impact Of Price Deregulation On WPI Index

8

PRODUC T

S

Curr e n t

p ric e

(si n c e 26 th

J u n e, 2010)

Hik e in

Rs .

%

in cr ea s e

We ig h t i n

WP

Ib a sk e t(bp s)

Imp a ct o n

In fla tio n (bp s)

P e trol 51.43 3.5 7.3 89 6.5

Hig h S p ee d

Die s e l

40.10 2 5.25 202 10.61

LPG 345.35 35 11.3 180 20.34

Ke ros e n e 12.32 3 32.2 70 22.54

Ov e r a ll 54 1 59.99

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Inflation

Although direct impact on WPI by deregulation is 59.99

bps but due to increase in fuel price will also increase price

other commodities which will result in increase in inflation by0.9% to 1.5%.

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Public Finance:U nder-recoveries will reduce from ~` .770 bn to ` .530 bn

As Petrol is fully deregulated so under-recoveries on petrol, ~ 10% will be fully wiped out.

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In te r e st R a te s

T he deregulation has impacted the rise in overall fuel prices,

which will increase the prices of products & food due to

increase in transportation cost. As we have shown above theoverall impact on WPI by 59.90 bps thus, higher inflation

resulted in tightening of Monetary Policy we seen on 27 th July,

2010.

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Improve Valuation of OMC

Due to increase in fuel price the profit of Oil marketing

companies will improve will result in result in higher Earning

per share

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Private Players Will Re-emerge

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