Cooling crude raises demand for domestic price cuts

Cooling crude raises demand for domestic price cuts
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First Published: Wed, Sep 03 2008. 12 30 AM IST

Reduced prices? A worker cleans a petrol tanker. Crude oil fell below $106 a barrel as energy companies prepared to resume production. Soumitra Ghosh /HT
Reduced prices? A worker cleans a petrol tanker. Crude oil fell below $106 a barrel as energy companies prepared to resume production. Soumitra Ghosh /HT
Updated: Wed, Sep 03 2008. 12 30 AM IST
New Delhi: The drop in world crude oil prices to a five-month low of $105 (Rs4,652) per barrel will lessen the subsidy burden on state-run oil firms, but political pressure could mount on the government to reduce domestic prices, against the backdrop of inflation at a 16-year high and expectations of a further drop in crude.
Stock market investors celebrated the decline, with the Bombay Stock Exchange’s benchmark Sensex gaining 3.8% to 15,049.86 points. Bond yields, which move in a direction opposite to prices, declined, with yield on the benchmark 10-year paper at its lowest level since 27 June.
The government raised domestic fuel prices by about 10% on 4 June, when the international crude oil price was $123 per barrel.
Crude oil fell below $106 a barrel as energy companies prepared to resume production at platforms in the Gulf of Mexico closed by hurricane Gustav. Oil is down more than $40 from its July record.
“The absence of serious structural damage from Gustav when the market was braced for the worst has caused prices to turn decisively downwards,” said Christopher Bellew, a senior broker at Bache Commodities Ltd in London. “As technical selling takes hold, it looks likely we’ll breach $100.”
Reduced prices? A worker cleans a petrol tanker. Crude oil fell below $106 a barrel as energy companies prepared to resume production. Soumitra Ghosh /HT
Although petroleum minister Murli Deora ruled out a price cut on Monday, some sections of the Congress party are preparing to lobby party president Sonia Gandhi.
“A cut in the fuel prices will give great mileage to the party. We have not yet thought about it and the petroleum minister has already ruled it out,” said a senior Congress leader, who asked not to be named. “However, we will have to think in that direction as the party is going to face crucial state elections. We will take it up with the Congress president. Even if we do not raise it, others will demand it.”
Opposition parties were quick to seize the initiative, with the Left parties, which parted ways with the ruling United Progressive Alliance, or UPA, in July over the government’s decision to push ahead with the Indo-US nuclear deal, leading the charge.
“In the light of the fall in the international prices, the government should commiserate and there should be a reduction in the prices,” said Prakash Karat, general secretary of the Communist Party of India (Marxist).
Communist Party of India national secretary D. Raja said, “Whenever they (the government) increased the fuel prices, they cited international price hike as an excuse. Now with the international prices falling, the government is silent over a possible reduction in the prices.”
The Bharatiya Janata Party, or BJP, the largest opposition party, is proposing to include the demand in the agenda of a three-day national executive meeting scheduled to begin from 12 September. “The government is duty-bound to do that,” said BJP vice-president M. Venkaiah Naidu. “The high fuel prices have triggered the price rise of essential commodities. They will have to unburden the common man.”
Some UPA allies voiced a similar demand. Mohan Singh, a Lok Sabha member belonging to the Samajwadi Party, whose support helped the government win a 22 July confidence vote in Parliament after the Left withdrew support, said the government should “definitely” lower the prices of petrol and diesel.
“The government should not fall into the trap of oil companies, who are out to make profits,” he said. “A government should always stand for ordinary people, not for the companies.”
Some analysts say that the move to reduce domestic prices in tandem with the drop in crude price would be premature. “At present oil companies are struggling with under-recoveries. While politically it would be a smart move, it is bad economics,” said one expert who did not wish to be identified.
A New Delhi-based analyst, who also asked not to be named, said given the volatility in crude oil prices, the government should adopt a “wait-and-watch” stance. “In case crude prices continue to fall and crude stabilizes at levels below $100, the government can consider reducing the prices,” this analyst said.
Inflation, as measured by the wholesale price index, was still at a 16-year high of 12.4% for the week ended 16 August although it edged down from the previous week.
National Institute of Public Finance and Policy director M. Govinda Rao said crude oil price had risen 250% since the UPA came to power in 2004 while the government had increased prices by only 50%.
“There is no case for decreasing domestic oil prices. If at all, there is a case for increasing the prices,” Rao said. “Even at the current level of crude price, the government will incur a huge deficit burden. The government should at least keep oil price where it is, if it does not want to increase prices.”
liz.m@livemint.com
Asit Ranjan Mishra and Bloomberg contributed to this story.
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First Published: Wed, Sep 03 2008. 12 30 AM IST
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