oil price deregulation
Post on 24-Feb-2016
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OIL PRICE DEREGULATION1
DEREGULATIONDecontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices. In the case of diesel prices, though it will be only partially regulated- the reason being an attempt to avoid sudden spike in inflation.
2IntroductionGovernment of India deregulated the prices of petroleum products
Decision was taken on 25th June 2010 at EGOM (Empowered Group of Ministers)
Decision was made on the basis of recommendation by Kirit Parikh Committee
Kirit Parikh Committee Recommendation4
* the figures are based on prevailing prices in 2009-10 The Big RiderThis is not the first attempt by the government to deregulate petroleum product prices.
In April 2002, in an attempt to phase out subsidy on petroleum products, the government dismantled the administered pricing mechanism (APM) for pricing of Petrol and diesel
To revise retail prices within a band of +/-10% of the mean of rolling average of the last 12 months5
6APM and the oil pool account abolished in 2002Government starts providing subsidies in the annual budget for petroleum productsOMCs took control of adjusting pricesDeficits started to grow from 2004By 2006 the deficit was Rs. 400 billion for petrol and diesel
Between 2002 and 2005 the prices of petrol increased 64% in India
International prices increased over 140%
The government issued government bonds to OMCs in order to reduce under recoveries in 2005-06
9ReasonsTo reduce the losses of oil marketing companies which are borne by:Upstream oil sector companies like ONGC, OIL INDIAGovernment: By issuing oil bondsThe residual amount is borne by OMC like HPCL, BPCL, etc.To increase competition, since private companies do not receive financial support
The Ugly TruthCrude oil : $115/barrelTranslates to Rs 33.20/ litreFinal Petrol Price : Rs. 41.25/ litreThe price we pay : Rs 63.77
* percentages are with respect to selling price.
Why high prices?Very high central taxes
State government charge even higher taxes
75% of petroleum products are imported
Inelastic demand for Oil
Impact of DEREGULATION13
Impact of DeregulationIncrease in PricesInflationInterest ratePublic FinancePrivate players will re-emergeImprove Valuation of OMC
Increase In Prices16ProductIncrease in Rs.Increase in %PETROL15.77/ ltr32.9DIESEL3.09/ ltr8.1LPG85/ cylinder27.38KEROSENE5.51/ ltr59.12
InflationImpact Of Price Deregulation On WPI Index
17PRODUCTSCurrent price in Rs. (since 26th June, 2010)Hike in Rs. (since 26th June, 2010)% increaseWeight inWPIbasket(bps)Impact on Inflation(bps)Petrol63.7015.7732.9010944.04High Speed Diesel41.293.098.1046795.27LPG395.358527.389129.17Kerosene 14.835.5159.127344.31Overall740124.53InflationAlthough direct impact on WPI by deregulation is 124.53 bps but increase in fuel price will also increase price of other commodities which will result in increase in inflation by another 90 to 150 bps.
Public FinanceUnder-recoveries will reduce from Rs.770 billion to Rs. 530 billion
As Petrol is fully deregulated so under-recoveries on petrol, ~10% will be fully wiped out.19
20ProductUnitUnder-Recovery (eff. 01-Sep-11)PetrolRs. / Litre0DieselRs. / Litre4.57PDS KeroseneRs. / Litre23.56Domestic LPGRs. /Cylinder267.00OMCs are currently incurring daily under-recovery of Rs.228 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.Fiscal DeficitGovernment in reducing Fiscal Deficit which is roaring around 11% (including off-balance sheet items like Oil Bonds, Subsidies, etc)
Interest RatesThe deregulation has impacted the rise in overall fuel prices, which will increase the prices of products & food due to increase in transportation cost. As we have shown above the overall impact on WPI by 124.53 bps thus, higher inflation resulted in tightening of Monetary Policy.
Sudden Effect on the Share MarketExploration stocks, ONGC and Oil India rose by between 3.36% to 5.01%,
Improve Valuation of OMCDue to increase in fuel price the profit of Oil marketing companies will improve which will result in higher Earning per share.24
Private Players Will Re-emerge25
CONCLUSIONThe overall de-regularising effect will be helpful to Government
Reduction in subsidies
However, absence of:The timeline of the diesel price deregulation,The frequency of change in petrol price, andPricing limit (band) for petrol price takes some sheen off the decision.