Transcript Slide 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; www.irade.org
Feb 2, 2010
Background
India’s Import Dependence – 80% and Growing
Volatile World Market Price of Crude oil.
How do we deal with it
Crude Oil (Brent) Price (US$/Barrel)
• July ’08 - $ 135.00
• July’ 09 - $ 40.00
2
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.
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.
Consumption of Petroleum Products,
2001-02 to 2030-31
(
Million Tonnes)
Actual Consumption
Product
2001-02
2004-05
2008-09
Projections
CAGR
2002-09
2020-21
2030-31
MS
7.0
8.3
11.3
7.0
25.4
49.9
HSD
36.5
39.7
51.7
5.1
93.5
153.4
SKO
10.4
9.4
9.3
-1.6
7.6
6.5
LPG
7.7
10.2
12.2
6.7
26.6
51.1
Sensitive
Products
Free Industrial
Products
61.7
67.5
84.4
4.6
144.4
226.0
38.7
44.1
49.0
3.4
73.3
102.6
TOTAL
100.4
111.6
133.4
4.1
217.0
325.6
Source: PPAC
Total under recoveries of oil marketing
companies at different levels of Crude Prices,
2009-10 to 2030-31
Source: PPAC
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.
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.
Why control Prices? (contd.)
4. Intervene to insulate economy from oil
volatility
 May cause inflation which may persist
when price comes down
 No clear evidence that in an open
competitive economy, impact of transient
increase persists
price
even
and
price
Issues
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
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.
On whom the burden falls depends on the
policies and instruments used
Policies are examined from that point of view
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?
Impact of Petrol Price Liberalisation
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
Burden on
 Two Wheeler Owner
Average
Consumption
86 litres/year
Monthly
Expenditure (Rs.)
Additional Monthly expenditure
(Rs.)
$ 70 / bbl
$ 80 / bbl
$ 120 /bbl
320
50
160
 Car Owner
Average
Consumption
593 litres/year
Monthly
Expenditure (Rs.)
Additional Monthly expenditure
(Rs.)
$ 70 / bbl
$ 80 / bbl
$ 120 /bbl
2210
350
1150
Market Determined Pricing is recommended for Petrol both at refinery gate and at
retail level
User-wise percentage share in total diesel
consumption, 2008-09
Source: PPAC
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 1/8th due to present diesel
policy
Diesel Price Policy (Others)
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. 22000/-,
about 50% of the total fare
Higher Diesel prices will lead to freight shifting from Road to Rail (which uses
1/4th 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 (2008-09)
Inflationary impact of subsidy will be comparable with the above.
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
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.10000 per year.
 The present discounted value at 10% discount rate over the 10-year life of a vehicle
would be around Rs. 67,500.00 and at 5% discount rate it would be Rs. 81,000.00
 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
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 (2004-05 stats)
 Among the poorest four deciles, less than 1% used it for cooking but 60% used it
for lighting (2004-05 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.
PDS Kerosene – Rationalize Allocation
 Average per capita kerosene allocation in high income States in 2007-08
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
1999-2000, as compared to 24% in low income States.
 Average reduction in allocation from 1999-00 to 2005-06 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
Kerosene Consumption
Expenses on PDS Kerosene consumption, Discretionary items and Total household consumption (Mean Values)
Quantity of Kerosene Consumed @ (Litre)
Decile
Only from
PDS
Only from
Other
Sources
From both Sources*
Expenses (Rs.)
On PDS
Kerosene
On
discretionary
items#
Total
household
consumption
28.4
33.4
34.9
211.1
343.9
991.8
1,386.6
2,222.5
5,872.1
41.0
49.1
42.2
335.7
642.1
2524.4
2,016.0
3,444.5
10,014.6
RURAL
1
5
10
Total
2.7
3.3
3.4
3.3
2.2
2.7
3.6
2.8
4.8
5.6
6.8
5.7
URBAN
1
5
10
Total
4.0
4.5
3.9
4.2
3.4
5.2
4.6
4.6
7.4
10.1
9.2
9.5
@ 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 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 2003-04 to Rs.28,225 crore in 2008-09.
 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.
Unequal allocation of PDS Kerosene
in States
Allocation of PDS Kerosene
60
50
40
30
20
10
0
High Income
Middle Income
Per Capita Net State Domestic Product, 2005-06 (‘000 Rs)
Low Income
Per Capita Kerosene allocation 2007-08 (Litre)
•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.
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)
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 2002.
We take increase in per capita agricultural GDP as a proxy for rural
income, which would have increased by more.
During 2002-03 to 2009-10, the per capita agriculture GDP at
current prices has increased by around 66% from Rs 4470 to Rs
7910.
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.
Pattern of LPG Consumption
 Present Subsidy is Rs 285 per Cylinder of 14.2 kg
Total LPG Subsidy (Rs. Crore)
2003-04
5,523
2008-09
17,600
2009-10(Est)
14,152
Who gets LPG subsidy (percent of Total LPG)
Households
Poorest 40%
Middle 30%
Richest 30%
Rural
0.6
3.5
20.9
Urban
11.4
24.4
39.1
(NSSO survey of 2004-05)
 In 2004-05, 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
Expenditure on LPG and Cylinders Used
Mean Monthly Expenditure on LPG by LPG using households over 30 days (Rs.) and implied quantity (cylinders)
Decile
Poorest 1st
2
3
4
5
6
7
8
9
Richest 10
Mean Monthly Expenditure on
LPG (Rs.)
Mean Total Household consumption
expenditure
Rural
Urban
No. of 14.2 KG cylinders /
year
Rural
Urban
Rural
Urban
125.2
205.9
1501.8
2378.0
5.17
8.17
163.7
153.1
145.9
176.6
189.1
179.9
185.0
189.0
196.1
222.1
234.9
239.1
245.0
255.3
248.7
255.2
256.9
250.0
2928.6
2367.7
2369.5
2793.3
2952.0
3111.7
3493.5
3971.5
6597.5
2816.8
3132.3
3542.6
3853.1
4390.9
4677.8
5270.0
6304.2
10818.8
6.62
6.18
5.98
7.09
7.53
7.27
7.41
7.56
7.91
9.10
9.35
9.60
9.79
10.29
10.19
10.17
10.37
10.17
Source: NSSO Survey(Note 4, Appendix)
Long Term LPG Policy
 Subsidized LPG for poor consumers
Target effectively through smart card/ Unique
Identification system
Revising LPG Price
Expenditure on LPG was less than 10 per cent of their total consumption
expenditure in 2004-05.
The per capita urban GDP during 2003-04 to 2009-10 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 2003-04 by 85% to Rs. 485/cylinder in 2009-10, then the burden
of LPG expenditure be at the level of 2003-04.
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
LPG Rationing
 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.
Reduction in under-recoveries due to
recommendations
Product
Measures
Annual Financial
Impact (Rs. Crore)
At 2009-10 level of Under recoveries
- Petrol
No under-recovery
- Diesel
No under-recovery
- PDS Kerosene a) Reduction in allocation by 20%
a) Increase in price by Rs.6/- on the
reduced quantity
- Domestic
Increase in price by Rs.100/Cylinder
LPG
Total
Note: Audited figures for April-December 2009 and estimates for January-March 2010.
5,103
8,894
3,484
5,390
7,580
30,451
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
Price Range
($/bbl)
Rate of Tax
(% of the incremental price)
60 – 70
20 %
70 – 80
40%
80 – 90
60%
Above 90
80%
Remaining Under-recoveries
Table UR 2: Financing of Under-recovery of PDS Kerosene and Domestic LPG
Crude Oil Price level($/bbl)
70
80
100
Sale Volume - PDS SKO (Million KL)
11.7
11.7
11.7
Sale Volume - Domestic LPG (Million Cylinder)
788.3
788.3
120
11.7
140
11.7
788.3
788.3
788.3
Under-recovery per Unit of PDS SKO & Domestic LPG
PDS SKO (Rs./Litre)
Domestic LPG (Rs./Cylinders)
17.4
20.7
27.4
34.1
40.7
206.0
244.4
321.4
398.3
475.2
Total Under Recovery
i.
PDS SKO (Rs. Crore)
20300
24200
32000
39800
47500
ii.
Domestic LPG (Rs. Crore)
16200
19300
25300
31400
37500
iii
Total (i+ii)
36500
43500
57300
71200
85000
Measures to reduce under recovery
iv
Reduction in SKO allocation by 20%
4100
4800
6400
8000
9500
v
Increase in Price of SKO by : Rs. 6 / Litre
6100
6100
6100
6100
6100
vi
Increase in Price of LPG by : Rs. 100 / Cylinder
7600
7600
7600
7600
7600
vii
Sub-total: If all three measures adopted (iv+v+vi)
17800
18500
20100
21700
23200
viii
Balance Under recoveries after (iii-vii)
18700
25000
37200
49500
61800
ix
Contribution by upstream oil companies
1660
4980
16600
29880
43170
x
Under recoveries remaining (viii-ix)
17040
20020
20600
19620
18630
Subsidies provided through budget *
xi
xii
a.
PDS Kerosene
960
960
960
960
960
a.
Domestic LPG
1780
1780
1780
1780
1780
2740
2740
2740
2740
2740
Total (a+b)
Total to be financed by Government Budget (x+xi)
19780
22760
23340
22360
21370
Viability of Recommendations
The under recoveries to be financed by the Government from its
budget remains constant at around Rs 20000 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
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
Additional Impacts
Energy Security:
 Financially strong and globally competitive oil industry
provides an enduring platform to strengthen energy security
 Leads to efficient usage of fossil fuel
1.
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
Ensuring Competition
Regulation should ensure that
competition prevails