OIL PRICE DEREGULATION

1

DEREGULATION

Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices. In the case of diesel prices, though it will be only partially regulated- the reason being an attempt to avoid sudden spike in inflation.

2

3

Introduction• Government of India deregulated the prices of petroleum

products

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

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

4

Kirit Parikh Committee Recommendation

* the figures are based on prevailing prices in 2009-10

5

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 and diesel

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

average of the last 12 months

ECONOMY BEFORE

DEREGULATION

6

• APM and the oil pool account abolished in 2002• Government starts providing subsidies in the annual budget for petroleum products

• OMCs took control of adjusting prices• Deficit’s started to grow from 2004• By 2006 the deficit was Rs. 400 billion for petrol and diesel

7

8

• Between 2002 and 2005 the prices of petrol increased 64% in India

• International prices increased over 140%

• The government issued government bonds to OMC’s in order to reduce under – recoveries in 2005-06

9

10

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 oil bonds

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

2. To increase competition, since private companies do not

receive financial support

11

The Ugly Truth• Crude oil : $115/barrel• Translates to Rs 33.20/ litre• Final Petrol Price : Rs. 41.25/ litre• The price we pay : Rs 63.77

* percentages are with respect to selling price.

Why high prices?• Very high central taxes

• State government charge even higher taxes

• 75% of petroleum products are imported

• Inelastic demand for Oil

12

13

IMPACT OF DEREGULATION

14

Impact of Deregulation

• Increase in Prices

• Inflation

• Interest rate

• Public Finance

• Private players will re-emerge

• Improve Valuation of OMC

15

16

Increase In Prices

Product Increase in Rs.

Increase in %

PETROL 15.77/ ltr 32.9

DIESEL 3.09/ ltr 8.1

LPG 85/ cylinder 27.38

KEROSENE 5.51/ ltr 59.12

17

Inflation

•Impact Of Price Deregulation On WPI Index

PRODUCTS

Current price in Rs. (since 26th June, 2010)

Hike in Rs. (since 26th June, 2010)

% increase

Weight inWPIbasket(bps)

Impact on Inflation(bps)

Petrol 63.70 15.77 32.90 109 44.04

High Speed Diesel

41.29 3.09 8.10 467 95.27

LPG 395.35 85 27.38 91 29.17

Kerosene 14.83 5.51 59.12 73 44.31

Overall 740 124.53

18

Inflation

Although direct impact on WPI by deregulation is

124.53 bps but increase in fuel price will also increase price of

other commodities which will result in increase in inflation by

another 90 to 150 bps.

19

Public Finance• Under-recoveries will reduce from Rs.770 billion to Rs.

530 billion

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

20

Under-RecoveryProduct Unit Under-Recovery

(eff. 01-Sep-11)

Petrol Rs. / Litre 0

Diesel Rs. / Litre 4.57

PDS Kerosene Rs. / Litre 23.56

Domestic LPG Rs. /Cylinder 267.00

OMCs are currently incurring daily under-recovery of Rs.228 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.

21

Fiscal Deficit

• Government in reducing Fiscal Deficit which is roaring around

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

Subsidies, etc)

22

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 124.53 bps thus, higher inflation

resulted in tightening of Monetary Policy.

23

Sudden Effect on the Share Market• Exploration stocks, ONGC and Oil India rose by between

3.36% to 5.01%,

24

Improve Valuation of OMC

• Due to increase in fuel price the profit of Oil marketing

companies will improve which will result in higher Earning per

share.

25

Private Players Will Re-emerge

26

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.

27

THANK YOU