When diesel ran out of supply from fuel stations in Chennai and Bangalore recently, it was the first indication that the country is headed for a shortage of the most popular fuel in the country.

The demand for diesel is rising at 25 per cent annually, while the crude oil refiners are capable of catering to only 12-15 per cent growth.

"A crisis in the availability of diesel is a strong possibility till new refinery capacities come up," said a Hindustan Petroleum Corporation [Get Quote] Limited official, which operates around 9 per cent of the country's refining capacity.

The country's refineries produced around 58 million tonnes of diesel in 2007-08.

Diesel is about 31 per cent cheaper than petrol because of higher subsidies. As a result, its consumption outstrips that of petrol by nearly four-and-a-half times.

The ratio could be skewed further in favour of diesel in the days to come. In contrast to the 25 per cent growth in the demand for diesel, growth in petrol demand is 10-11 per cent.

Over the last 8-9 months, diesel demand has grown further due to increased use in power generators. "The demand growth is due to higher use of diesel in generator sets," said Sarthak Behuria, chairman of Indian Oil Corporation [Get Quote], which controls over 40 per cent of the country's oil refining capacity.

The demand from industry has also increased as prices of other fuels such as naphtha have nearly doubled in the last year.

The three government-owned refineries -- IOC, HPCL and Bharat Petroleum Corporation [Get Quote] -- cannot increase the production of diesel from their refineries as it would have to be done at the cost of either kerosene or aviation fuel production.

"We can cut kerosene or aviation fuel production, but that would again affect the availability of these fuels," said BPCL Director (refineries) RK Singh.

Diesel production constitutes around 35 per cent of the total petroleum products produced by the government-owned oil refineries, while kerosene makes up 8 per cent and aviation fuel around 6 per cent.

The oil refineries are, however, working on various ways to tackle this shortage.

"One option could be that we increase diesel production at the expense of kerosene, and import kerosene instead which can be done at zero duties," Singh said.

IOC, on the other hand, is attempting to control the demand by stopping sale of subsidised diesel from fuel stations to people other than vehicle owners.

"The 25 per cent growth in demand is unreal. Our refineries are geared up to meet the normal growth of 12-15 per cent," said IOC's Behuria. He said the company would not cut production of other fuels to produce more diesel.

The price of petroleum products in the global markets is higher by around 14-15 per cent than the price of crude oil.

"The basic problem is that we do not have the money to import petroleum products," said another senior IOC official. The company imports crude oil to produce the petroleum products the country needs.