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A Viable and Sustainable System of Pricing Petroleum Products The Logic of the Expert Group Report Kirit S. Parikh Chairman, Expert Group Chairman, IRADe;

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Presentation on theme: "A Viable and Sustainable System of Pricing Petroleum Products The Logic of the Expert Group Report Kirit S. Parikh Chairman, Expert Group Chairman, IRADe;"— Presentation transcript:

1 A Viable and Sustainable System of Pricing Petroleum Products The Logic of the Expert Group Report Kirit S. Parikh Chairman, Expert Group Chairman, IRADe; Feb 2, 2010

2 Crude Oil (Brent) Price (US$/Barrel) July ’08 - $ July’ 09 - $ Background  India’s Import Dependence – 80% and Growing  Volatile World Market Price of Crude oil.  How do we deal with it

3 PRESENT POLICIES & CONSEQUENCES  Consumers protected, price not passed through  Large UNDER RECOVERIES {=sales-cost} for Oil Marketing Companies (OMCs) shared by Upstream cos. and Govt.  Under recoveries:  2008 to 2009: 103 thousand crore  2003 to 2009: 300 thousand crore  Reduced surplus of Upstream cos. – reduced ability to explore  Stressed Govt. Finance  No incentive to consumers to economise use  Private firms left the market, no competition.

4 Need For Change in Policy  Our consumption is growing and present policy would lead to large under recoveries  It is unsustainable: Government cannot bear the cost without upsetting other development programmes.

5 Product Actual ConsumptionProjections CAGR MS HSD SKO LPG Sensitive Products Free Industrial Products TOTAL Consumption of Petroleum Products, to Source: PPAC ( Million Tonnes)

6 Total under recoveries of oil marketing companies at different levels of Crude Prices, to Source: PPAC

7 Viable Long Term Policy  Workable over wide range of international oil prices  Meets various objectives of Government  Reduces Government’s Fiscal burden  Keeps domestic oil industry financially healthy and competitive  Reducing fossil fuel use is good for energy security and environment including climate change.

8 Why control Prices? 1.Protect the poor 2.Provide Kerosene for lighting 3.Provide clean cooking fuel – a merit good {i.e. we want people to consume} because cooking with fire wood and dung causes indoor air pollution, respiratory diseases, eye infection and keeps girl away from school to gather fuel.

9 Why control Prices? (contd.) 4. Intervene to insulate economy from oil price volatility  May cause inflation which may persist even when price comes down  No clear evidence that in an open and competitive economy, impact of transient price increase persists

10 1.Difficult to differentiate secular price increase from demand supply forces and transient increase from speculation 2.Increase energy security for which we need to-  Keep domestic firms viable  Have a competitive petroleum economy Issues

11 When Crude Price Rises  Some body has to bear the cost a. If the Government bears it, how does it finance it? i. Taxes – will lead to price rise ii. Fiscal deficit – can cause inflation iii. Cutting Expenditure –social programmes (funds) which helps the poor get affected.

12 On whom the burden falls depends on the policies and instruments used Policies are examined from that point of view

13 Petrol Price Policy  Consumed by the well to do sections – No justification for subsidy  Item of final consumption. Low impact on inflation  Price increase will lead to efficiency and conservation.  Burden depends upon who uses how much Petrol?

14 Impact of Petrol Price Liberalisation Burden on  Two Wheeler Owner Average Consumption Monthly Expenditure (Rs.) Additional Monthly expenditure (Rs.) $ 70 / bbl$ 80 / bbl$ 120 /bbl 86 litres/year  Car Owner Average Consumption Monthly Expenditure (Rs.) Additional Monthly expenditure (Rs.) $ 70 / bbl$ 80 / bbl$ 120 /bbl 593 litres/year Market Determined Pricing is recommended for Petrol both at refinery gate and at retail level Petrol price will increase by Rs. 7 per litre when crude price becomes $80 / bbl and by Rs. 23 / litre at crude prices becomes- $120 / bbl

15 User-wise percentage share in total diesel consumption, Source: PPAC

16 Diesel Price Policy (Burden on Agriculture)  Agriculture (12%) Diesel price increase will get reflected in MSP (minimum support prices) for major crops Higher Diesel price will lead to judicious use of ground water for irrigation by farmers Government should keep PDS price of food grain constant to poor consumer. Additional subsidy burden on PDS would be 1/8 th due to present diesel policy

17  Trucks (37%), Industrial (10%), Power Generators (8%) Truck owners hike fares due to high economic growth Diesel Consumption for a 9 ton truck for Delhi-Mumbai round trip is Rs /-, about 50% of the total fare Higher Diesel prices will lead to freight shifting from Road to Rail (which uses 1/4 th as much diesel as Trucks) Higher Diesel prices will result in efficiency Total pass through of cost means an increase of Rs. 4/litre which means an additional Rs. 20,000 crore of diesel cost borne by truckers, industrial users and power generators which in only 0.4% of GDP ( ) Inflationary impact of subsidy will be comparable with the above. Diesel Price Policy (Others)

18 Diesel Price Policy (Passenger Cars)  Passenger Cars (15%)  Like petrol users, there is no justification to subsidize diesel car owners Market Determined Pricing is recommended for Diesel both at refinery gate and at retail level

19 Additional Excise on Diesel driven Cars  Petrol has a higher excise duty than diesel. Diesel car owners escape this.  At the present excise rates, the additional excise duty paid by a urban petrol vehicle owner who on an average drives 5000 KM/year and gets an average mileage of 13.5 KM/litre is around Rs per year.  The present discounted value at 10% discount rate over the 10-year life of a vehicle would be around Rs. 67, and at 5% discount rate it would be Rs. 81,  At the present rates and at discount rate of 5 per cent, a differential excise duty of Rs. 80,000 should be levied on diesel driven vehicles

20 Kerosene Use  It is a bare necessity for lighting, in households without electricity.  Kerosene Subsidy to poor households is justifiable. Should be effectively targeted through smart cards  Only 1.3% of rural households use kerosene for cooking ( stats)  Among the poorest four deciles, less than 1% used it for cooking but 60% used it for lighting ( stats).  The average rural household in the poorest decile spends around 2 per cent of its monthly expenditure on kerosene.  The expenditure on kerosene is only 13 % of its discretionary expenditure.  There is scope to raise kerosene price  The LCD lighting system can substitute lighting by kerosene.

21 PDS Kerosene – Rationalize Allocation  Average per capita kerosene allocation in high income States in was 14.1 litre which was 41% higher than that of the low income States.  53% of households in high income States have exited PDS kerosene since , as compared to 24% in low income States.  Average reduction in allocation from to is only 12.8% while 32.6% of households exited from PDS Kerosene during the same period. Subsequently 2.4 crore BPL households have been provided subsidized Electricity connections under RGGVY  Need for immediate reduction in allocation of PDS kerosene by 20%  Need for periodic reduction in allocation based on the progress of RGGVY

22 Decile Quantity of Kerosene (Litre)Expenses (Rs.) Only from PDS Only from Other Sources From both Sources * On PDS Kerosene On discretionary items # Total household consumption RURAL , , ,872.1 Total URBAN , , ,014.6 Total Expenses on PDS Kerosene consumption, Discretionary items and Total household consumption (Mean The figures relate to different categories of households. # Discretionary items include entertainment, personal effects, toilet articles, sundry articles, consumer services and conveyance. Source: NSSO Survey ( Note 4, Appendix) Kerosene Consumption

23 Kerosene Price Policy  PDS Kerosene price has remained at around Rs.9 per litre (at Delhi) since 2002  The under-recovery on kerosene has grown from Rs. 3,751 crore in to Rs.28,225 crore in  Large difference between prices of diesel and kerosene, and between kerosene price in India and neighboring countries lead to lot of diversions and smuggling.  There is need to raise price of Kerosene.

24 Unequal allocation of PDS Kerosene in States Source:Col.2: Economic Survey, Govt. of India,Col.3: PPAC, Col.4: NSSO Surveys of Household Expenditure, Col.5: PPAC Col.6: Derived by subtracting Col.5 from Co.4 (figures may not exactly match due to aggregation and rounding off data) High Income: Chandigarh, Goa, Delhi, Pudicherry, Haryana, Maharashtra, Punjab, A& N Islands, Gujarat, Himachal Pradesh Middle Income: Kerala, Tamil Nadu, Karnataka, Andhra Pradesh Low Income: West Bengal, Mizoram, Tripura, Uttarakhand, Arunachal Pradesh, Meghalaya, Manipur, Jharkhand, Assam, Orissa, Madhya Pradesh, Uttar Pradesh, Bihar. Allocation of PDS Kerosene

25 Raising Kerosene Price  If price is raised by the same percent as rural per capita income has increased since 2002, the burden would be same as in  We take increase in per capita agricultural GDP as a proxy for rural income, which would have increased by more.  During to , the per capita agriculture GDP at current prices has increased by around 66% from Rs 4470 to Rs  Price of PDS kerosene could be raised by 66% to reach a level of around Rs. 15/litre without putting undue burden on the poor. Recommend that price of PDS kerosene be raised by Rs.6/litre from Rs 9/litre to Rs 15/litre and should be revised every year in step with per capita agricultural GDP at nominal prices.

26 Pattern of LPG Consumption (Est) 5,52317,60014,152 Total LPG Subsidy (Rs. Crore) HouseholdsRuralUrban Poorest 40% Middle 30% Richest 30% (NSSO survey of )  In , 57% of urban but only 8.6% of rural households used LPG.  Top 3 decile in urban areas, some 22 million households, use nearly 40% of LPG  In the long term LPG distribution to the targeted group through UID/Smart Card Who gets LPG subsidy (percent of Total LPG)  Present Subsidy is Rs 285 per Cylinder of 14.2 kg

27 Decile Mean Monthly Expenditure on LPG (Rs.) Mean Total Household consumption expenditure No. of 14.2 KG cylinders / year RuralUrbanRuralUrbanRuralUrban Poorest 1 st Richest Mean Monthly Expenditure on LPG by LPG using households over 30 days (Rs.) and implied quantity (cylinders) Source: NSSO Survey(Note 4, Appendix) Expenditure on LPG and Cylinders Used

28 Long Term LPG Policy  Subsidized LPG for poor consumers  Target effectively through smart card/ Unique Identification system

29  Expenditure on LPG was less than 10 per cent of their total consumption expenditure in  The per capita urban GDP during to has increased by 84% from Rs 89,000 to Rs 1,48,500  If Price of domestic LPG cylinder, is raised from the base price of Rs. 262/cylinder in by 85% to Rs. 485/cylinder in , then the burden of LPG expenditure be at the level of  The price of 14.2 kg LPG cylinder should be raised by at least Rs. 100 per 14.2 Kg cylinder.  Subsequent increase should based on increase in per capita GDP Revising LPG Price

30  We do not recommend rationing as it would be difficult to enforce, create an inspector raj and will not arrest diversion. In any case, Rs 100 increase is equivalent to ration of 6 cylinders at the level of cylinder use in most urban households. LPG Rationing

31 ProductMeasures Annual Financial Impact (Rs. Crore) At level of Under recoveries - PetrolNo under-recovery5,103 - DieselNo under-recovery8,894 - PDS Kerosenea)Reduction in allocation by 20%3,484 a)Increase in price by Rs.6/- on the reduced quantity 5,390 - Domestic LPG Increase in price by Rs.100/Cylinder7,580 Total30,451 Reduction in under-recoveries due to recommendations Note: Audited figures for April-December 2009 and estimates for January-March 2010.

32 Price Range ($/bbl) Rate of Tax (% of the incremental price) 60 – 7020 % 70 – 8040% 80 – 9060% Above 9080% Up-Stream Companies Contribution  ONGC and OIL were allotted blocks on nomination basis  A portion of their incremental income from production from these blocks should be able to set off some under-recoveries  The following is the suggested schedule

33 Remaining Under-recoveries Table UR 2: Financing of Under-recovery of PDS Kerosene and Domestic LPG Crude Oil Price level($/bbl) Sale Volume - PDS SKO (Million KL)11.7 Sale Volume - Domestic LPG (Million Cylinder)788.3 Under-recovery per Unit of PDS SKO & Domestic LPG PDS SKO (Rs./Litre) Domestic LPG (Rs./Cylinders) Total Under Recovery i.PDS SKO (Rs. Crore) ii.Domestic LPG (Rs. Crore) iiiTotal (i+ii) Measures to reduce under recovery ivReduction in SKO allocation by 20% vIncrease in Price of SKO by : Rs. 6 / Litre6100 viIncrease in Price of LPG by : Rs. 100 / Cylinder7600 vii Sub-total: If all three measures adopted (iv+v+vi) viiiBalance Under recoveries after (iii-vii) ixContribution by upstream oil companies xUnder recoveries remaining (viii-ix) Subsidies provided through budget * a.PDS Kerosene960 a.Domestic LPG1780 xiTotal (a+b)2740 xii Total to be financed by Government Budget (x+xi)

34 Viability of Recommendations  The under recoveries to be financed by the Government from its budget remains constant at around Rs crores over a wide range of crude price  Oil Marketing Companies (OMCs) have no under recoveries left uncompensated  Upstream companies have enough surplus to invest in exploration and expansion  Freeing petrol and diesel creates a competitive level playing field for all players, public and private  Will lead to a healthy and competitive oil industry

35 Impact of Recommendations on Inflation:  Less than present policies  Burden may fall on richer classes  Burden on poor will be less than that of present policies  Reduction in subsidy will lower misuse, and enhance consumption efficiency

36 Additional Impacts 1. Energy Security:  Financially strong and globally competitive oil industry provides an enduring platform to strengthen energy security  Leads to efficient usage of fossil fuel 2. Climate change/ GHG/ Environment:  Reduction of wasteful emission of GHG 3. Fuel Conservation:  Fuel conservation, as increase in price reduces the unnecessary and easily avoidable consumption  Conservation leads to extended time of usage in limited capacity reservoirs  Motivates to use improved energy efficient technologies and equipment

37 Ensuring Competition Regulation should ensure that competition prevails


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