India’s fuel companies Indian Oil Corporation (IOC), Bharat Petroleum Corporation and Hindustan Petroleum Corporation (HPCL) collectively lost $2.25 billion (Rs 19,000 crore) in revenue in March.
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Breakdown Of Losses
The three companies account for 90% of the Indian market.
IOC’s revenue loss is estimated to be around $1-1.1 billion while that of BPCL and HPCL to be about $550-650 million each over the same period.
They incurred losses as they kept petrol and diesel prices unchanged despite a sharp rise in crude oil prices.
Crude Oil Prices At Record High
Prices of crude oil (raw material for producing fuel) averaged around $111 per barrel in the first three weeks of March compared to around $82 in early November.
The state-owned fuel retailers had increased petrol and diesel prices by 80 paise per litre on March 22 and 23 but paused the hike on 24th.
The OMCs are losing around $25 (over Rs 1,900) per barrel and $24 per barrel on sale of petrol and diesel, respectively.
Hikes Paused During Elections
If crude prices continue to average around $111 a barrel, the three companies will incur a combined daily loss of around $65-70 million unless they increase fuel prices to cover the hike.
This comes up to around 20% of the combined FY2021 EBITDA for the three entities.
The companies’ refusal to increase retail selling prices of transportation fuels between November 4, 2021, and March 21, 2022 due to elections in five states will hurt their profitability.
If oil prices reduce, the companies may have a chance to make up for some of these losses over time.
Government Intervention For Hikes
Fuel prices in India are deregulated and the refiners can pass on cost increases to the consumer.
However, the level of the hike required in this case will have to be done in coordination with the government and may involve a reduction in excise duties.
It is expected that the government will allow the refiners to adjust prices appropriately and avoid a situation where the losses continue for a prolonged period.
The price hikes will take place gradually and over a period of time rather than being a one-time adjustment.
Alternate Energy Sources Over Fossil Fuels?
Due to this sustained high oil price environment, people will start looking to other energy sources.
However, demand for oil and gas is likely to continue growing despite slowing consumption growth rates.
This is because of the country’s high dependency on fossil fuels, growth potential and significant developmental needs which only fossil fuels can fulfil.
But if and when absolute demand does start to decline, India will first reduce imports before lowering domestic production.