OIL PRICE DEREGULATION

Ajay Gurbani-15

Hitesh Gurnasinghani-16

111 August 2010

2

Introduction• Government of India deregulated the prices of petroleum

products

• Decision was taken on 25 June 2010 at EGOM (Empowered Group of Ministers)

• Decision was made on the basis of recommendation by Kirit Parikh Committee

3

The Big Rider

• This 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

• To revise retail prices within a band of +/-10% of the mean of

rolling average of the last 12 months

4

Reasons

1. To reduce the losses of oil marketing companies which are

borne by:

Upstream oil sector companies like ONGC, OIL INDIA

Government: By issuing bonds

The residual amount is borne by OMC like HPCL, BPCL, etc.

2. To reduce competition, since private companies do not receive

financial support.

5

IMPACT OF DEREGULATION

6

Impact of Deregulation

• Increase in Prices

• Inflation

• Interest rate

• Public Finance

• Private players will re-emerge

• Improve Valuation of OMC

7

Increase In Prices:

Product Increase in ` Increase in %

PETROL 3.5/ltr 6.7

DIESEL 2/ltr5

LPG 35/cylinder 11.2

KEROSENE 3/ltr33.30

8

Inflation

•Impact Of Price Deregulation On WPI Index

PRODUCTS

Current

price

(since 26th

June, 2010)

Hike in

Rs.

%

increase

Weight in

WPI

basket(bps)

Impact on

Inflation(bps

)

Petrol 51.43 3.5 7.3 89 6.5

High Speed

Diesel40.10 2 5.25 202 10.61

LPG 345.35 35 11.3 180 20.34

Kerosene 12.32 3 32.2 70 22.54

Overall 541 59.99

9

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 by

0.9% to 1.5%.

10

Public Finance:

• Under-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.

11

Public Finance:

PRODUCTS PRE-DEREGULATION POST-DEREGULATION

PETROL 75 -

LPG 239 210

KEROSENE 199 17

DIESEL 257 150

TOTAL 770 530

IMPACT ON UNDER – RECOVERIES (` Bn)

Source CIRA estimates

12

Fiscal Deficit

• Government in reducing Fiscal Deficit which is roaring around

11% (including off-balance sheet items like Oil Bonds,

Subsidies, etc)

13

Fiscal Deficit

Following Chart Depicts Subsidy Sharing Mechanism After Deregulation

14

Interest Rates

• The 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 the

overall impact on WPI by 59.90 bps thus, higher inflation

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

2010.

15

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

16

Private Players Will Re-emerge

17

CONCLUSION• The overall de-regularising effect will be helpful to

Government

• Reduction in subsidies

• However, absence of:

oThe timeline of the diesel price deregulation,

oThe frequency of change in petrol price, and

oPricing limit (band) for petrol price takes some sheen off the

decision.

18

THANK YOU