Gearing for OPEC PDF Print E-mail
Tuesday, 06 December 2016 03:48
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Keep up the good work on LPG, kerosene


Predicting oil prices is a mug’s game, so it is not clear whether the recent run-up in global prices, from $46.86 per barrel to $50.47 per barrel in just a matter of four weeks will be sustained now that OPEC has agreed to cut production by 1.2 million barrels a day. Apart from it not being clear if the new-found OPEC unity will hold up, if oil prices rise beyond a point, this brings US shale back in play, ready to play the role of the swing producer. Also, given how global demand continues to remain sluggish—in April, IMF was looking at a 3.5% growth for 2017 but this has been scaled down to 3.4% in October—it seems unlikely crude prices will surge. It is, however, clear that the days of oil at $40 are over and, at least for the time being, the $50s seems more likely. Given oil was $35.97 per barrel at the time India’s budget was formulated, that’s a significant step-up, and a reminder that the government needs to remain steadfast on its oil sector reforms.

To be fair, the progress has been good so far, and not just because oil prices have been low. The UPA’s homeopathic increases in diesel prices, it is well known, allowed the NDA to finally decontrol diesel prices in October 2014—diesel subsidies had climbed to R92,061 crore in FY13—and, in overall terms, under-recoveries fell from a high of Rs 161,029 crore in FY13 to R27,571 crore in FY16; for the first half of FY17, they were Rs 7,827 crore. The most impressive work has been in LPG where 1.06 crore persons responded to the prime minister’s #GiveItUp campaign, another 50 lakh did not provide bank details required to get the subsidy, and another 3 crore were weeded out in the process of ensuring there were no ghost accounts. But, as a result of the government’s plan to give out 5 crore additional customers by 2019—the number of customers under the direct benefits scheme has risen from 14.62 crore towards the end of 2015 to 16.99 crore at present—sales of LPG which rose by 9% in FY16, grew by nearly 11% in April-October 2016. Which is why, it is important the government stick to its decision in July to hike prices of subsidised LPG by R2 per 14.2-kg cylinder every month.

Things are better in the case of kerosene where, after rising to Rs 29,410 crore in FY13, subsidies more than halved to Rs 11,496 crore in FY16, and to Rs 4,123 crore in the first half of FY17. While the earlier reductions were mostly driven by the fall in global prices, there has been a sharp cut in physical supplies of kerosene in the market—mostly the result of more LPG supplies in rural areas as well as due to greater electrification. In FY15, the first year of the Modi government saw a 1.1% cut in supplies, from 7.2 million tonnes in FY14—this was cut by another 3.7% to 6.8 million tonnes in FY16 and by as much as 13.5% in April-October 2016. Add to this the government’s decision in November to hike prices of kerosene by 25 paise per litre every fortnight all the way till February 2017, and its easy to see why subsidies are collapsing. As crude oil prices rise, along with the rupee weakening, this is the momentum the government has to maintain.



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