Kerosene, LPG subsidy seen at lowest in four years in September-October

Mumbai: The subsidy burden borne by the government on kerosene and cooking gas is expected to fall to its lowest when prices are revised in September if the Indian crude oil basket continues to stay below $45 per barrel.

The lowest price was last seen in February, when the Indian crude basket price fell to $45 per barrel, leading to a fall in the subsidy on kerosene and cooking gas at Rs.13.32 per litre and Rs.139.23 per 14.2kg cylinder, respectively.

This could mean higher savings for the government, lower losses for oil-marketing companies, and lower burden on oil and gas exploration and production companies who compensate the oil-marketing companies for the losses.

The price of Brent crude on Monday was at $43.90 per barrel.

The government revises kerosene and cooking gas prices on a monthly basis.

“With Brent crude hovering below $45 per barrel and expected to have a bearish bias in the short term, the oil sector subsidy burden of the government would come down to its lowest by next month,” said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.

The difference between the actual market price of the two fuels and the price charged to the customers is the money that the government shells out as subsidy and is jointly borne by the oil and gas exploration and production companies and the government.

According to data available with the Petroleum Planning and Analysis Cell, a statistical body under the oil ministry, as on 1 August, the market price for kerosene is at Rs.28.50 per litre, while the price charged to customers is Rs.15.24 per litre, which includes wholesaler and retailer commission. In effect, the data shows, the losses borne by the three oil marketing companies on kerosene are Rs.14.95 per litre. This is the price that the government and the oil exploration and upstream production companies are currently bearing.

Similarly, on cooking gas, the current market price is Rs.585 per cylinder while customers are charged Rs.417.82 per cylinder; the difference of Rs.167.18 per cylinder is borne by the government and the upstream companies.

Mishra said that while the subsidy is expected to come down with the current trend in oil prices, the dampener could be the dollar to rupee exchange rate, which could potentially take away some of these gains. As such from Indonesia to Egypt—many countries are doing rebalancing of the energy sector subsidy regimes, taking advantage of the low oil prices.

In February, when the subsidy burden of the government on kerosene and cooking gas came down to the lowest, the Indian crude basket was at $45.32 per barrel while the exchange rate was at Rs.61.70 per dollar, making India’s crude basket in rupee terms at Rs.2,796.24 per barrel. However, with the recent fall in the rupee-dollar exchange rate, the Indian crude basket in rupee terms is still hovering around Rs.2,857.93 per barrel, as per the exchange rate of Rs.66.51 per dollar as on Tuesday.

“We expect crude to come down and the rupee-dollar ratio to stay around the same level, so we could actually see a very low subsidy burden for the government, either in September and October,” said an analyst from an international brokerage. He did not want to be named because of his company policy.

He said the subsidy numbers in September might not show a major change as the price of Indian basket had averaged at $47.69 till 21 August and the rupee-dollar exchange ratio was at Rs.65.26 per dollar, taking the Indian basket price to Rs.3,112.25.

For 2015-16, the government has fixed a subsidy of Rs.12 per litre on kerosene and Rs.18 per kg on cooking gas. If the losses go beyond this price, the incremental loss of the fuel retailers has to be compensated by the upstream companies.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.