There’s no free lunch. This was what played in my mind when I read that India’s three state-run oil marketing companies (IOC, BPCL and HPCL) are running up huge and unbearable deficits owing to their under-recoveries, and this might start straining the government’s fiscal budget soon.
Let’s look at what’s happening. The oil marketing companies buy crude at market prices (say, about $80 a barrel) but they sell the finished product at much lower prices than what it costs them. The difference is paid for by the government, usually through oil bonds, burden sharing of the upstream companies such as ONGC and GAIL and some amount of losses borne by the oil marketing companies (OMCs) themselves.
In the last few months, owing to the high oil prices, the under-recoveries by the OMCs have hit record levels, and is expected to be about 1 lakh crores for 2010-11. This is a large amount. The finance ministry is keen not to issue oil bonds (as these are outside the budget) for these under-recoveries; in which case, the payments will need to be budgeted for, straining the fiscal deficit which is planned to be kept to under 5.5%
Of course, one somewhat sustainable solution is really to deregulate prices (essentially raise prices for almost all the petroleum products), but that will be a political no-no. The really sustainable solution is to decrease our reliance on externally imposed crude prices by relying more renewables, but then that is a fairly long term game…