If you thought the fuel price hike on Wednesday was bad news, the worst is yet to come. Global crude prices have soared by over $11 since then to cross $138 per barrel, and Morgan Stanley predicted they would hit $150 a barrel by July 4. The government would not dream of contemplating another price increase, given the violent opposition to the move. Net result is that each of us had better be prepared for tough times.

First, here is some food for thought. Diesel prices were increased by Rs3 per litre but its actual subsidy is over 10 times more. Petrol was up by Rs5 but the gap is still Rs15 per litre. And in the case of cooking gas, the oil companies lose Rs350 per cylinder supplied which means that even after the Rs50 hike, they are in the red. Kerosene was untouched but its subsidy is still a hefty Rs36 per litre.

A top executive of an oil marketing company told this writer that the price increases were clearly inadequate but the situation was still under control as long as crude prices stayed under the $125 per barrel mark. “We would be in big, big trouble if they shoot up alarmingly,” he said.

This is precisely what has happened. And the big three suppliers — IndianOil, Hindustan Petroleum and Bharat Petroleum — will now have no option but to go in for rationing of key fuels. No official communiqué has been made yet, but the danger signs are there for all to see. Fresh cooking gas connections have ceased and though officials insist this is a temporary move, there are no indications when this will be revoked.

Next on the radar will be diesel. Oil company officials say that rationing is inevitable because supplies are just not being able to cope with demand. And it is just not the transport sector that is the biggest consumer. Diesel generators are being used extensively in homes, farms, shops, factories, call centres and what have you thanks to the power crisis in major states. Equally, construction equipment used for roads, bridges, etc needs diesel.

“We never thought diesel consumption would reach such alarming levels; where we had estimated an 8 per cent rise in demand, it has been nearly 25 per cent since January this year,” the executive said. Prior to the price hike, the annual projected losses on sales of the four fuels were nearly Rs250,000 crore of which diesel’s share alone was nearly Rs150,000 crore. Imports are getting prohibitively expensive and IOC has already hinted that it may not be able to continue doing this forever.

Oil companies were also hoping that demand would fall after the price increase but diesel still continues to be much cheaper than petrol. If supplies are cut back, every user industry will suffer and the economy will begin to slow down.

The other option is to increase its prices even more but then inflation figures will shoot beyond the 10% mark and the common man will be hit real hard. Possibly, the only pragmatic route is to go in for an upward revision of 50 paise per litre every three weeks to cushion the blow.

We could also be overreacting. Hopefully, crude prices will fall in the coming months but this seems very unlikely. The choice boils down to either paying more for fuel or learning to live with limited supplies.

US to India: Cut subsidy
Energy officials from the world’s top consumer nations sought ways to tame record prices on Saturday, a day after oil’s biggest one-day surge ever, as the US energy secretary Sam Bodman singled out cheap Asian fuel as part of the problem.
But India’s ambassador said it was not realistic to abandon controls that help protect its 1.1bn people. “We are not in a position to completely do away with subsidies,” said Hemant Krishnan Singh, who is standing in for the oil minister before the G-8 summit in Japan.
Dow falls, dollar weakens
Oil’s meteoric surge, which also raised the prospect of accelerating inflation, sent stocks tumbling in the US late on Friday, taking the Dow Jones industrials down by nearly 400 points. The dollar also extended its weakness against other currencies on data showing the US economy lost jobs for the fifth month. Unemployment rate rose to its highest in over 3 years.

original post : DNAindia

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