Diesel prices may go up by Rs 2 in May

After being left unchanged for more than 10 months, diesel prices may see an increase of around Rs 2 per litre next month, providing marginal relief to the oil marketing companies (OMCs) that incur a loss of Rs 16.10 on selling every litre.

Diesel accounts for about 60 per cent of the total under-recovery (revenue loss) that OMCs bear on regulated sale of diesel, kerosene and domestic LPG.

The hike in diesel prices is expected to coincide with an increase in petrol where prices could go up to the tune of Rs 3 a litre.

Though petrol prices stand decontrolled, companies did not increase prices since mid-January and saw their losses widen to Rs 7 a litre.

Senior oil industry executives said the increase of Rs 2 in diesel and Rs 3 in petrol should face no resistance considering the sharp rise in crude oil prices.

"Inflation had prompted the government to keep prices under check for most of 2010. In the current calendar year, political environment and Assembly elections have been the main consideration. With elections drawing to an end in early May, we will pass on petrol hike and seek diesel increase," said an oil company official.

In June 2010 when the government decontrolled petrol price it said diesel price would also be market-determined.

However, it had restricted the increase to Rs 2 per litre.However, diesel decontrol remained on paper as companies were not allowed to increase price even though a series of increase was taken in petrol.

Optimists in the government expected international prices to fall from the levels of around $75 a barrel.

This could have prevented further increase. However, international crude oil prices started moving northwards and gained 60 per cent since June last year.

The Indian basket of crude oil has averaged around $118 a barrel so far in April, up 6.57 per cent from an already high base of $110.72 per barrel in March. On April 25, the basket stood at $120.47 a barrel.

The 2010-11 financial year average of $85.09 a barrel was 22 per cent higher than the 2009-10 average.

The Indian basket represents published freight on board prices of average of Oman/Dubai crude for sour grade and Brent for sweet grade in the ratio of 67.6:32.4.

The three OMCs - Indian Oil, Bharat Petroleum and Hindustan Petroleum - which purchase crude oil at market rates, are required to sell diesel, kerosene and liquefied petroleum gas at subsidised prices fixed by the government, resulting in losses.

The OMCs have incurred a gross under-recovery of over Rs 47,000 crore (Rs 470 billion) for the first three quarters of the last financial year.

The under-recovery for the last quarter is estimated at Rs 37,000 crore (Rs 370 billion).

These losses are partly compensated through a mix of cash subsidy from the government and discounts from upstream companies like Oil and Natural Gas Corporation and Oil India and partly absorbed by the OMCs.