The Planning Commission has initiated a discussion on a proposal to provide subsidies to both public and private sector refineries and end years of prejudice and injustice. Sources said the idea was broached at a meeting in March this year between Yojana Bhavan and the ministry of petroleum & natural gas.
The present system is loaded against the private refiners. The government continues to fix pump prices of petrol and diesel and a range of other petroleum products, including kerosene and gas cylinders used in kitchens, even though it supposedly took its hand off the tiller in April 2002 by scrapping the administered pricing mechanism.
However, the government compensates only state-owned oil companies for what it terms “under-recoveries” in petrol and diesel prices through the issue of oil bonds and discounts given by upstream oil companies such as the Oil and Natural Gas Corporation.
Under-recoveries arise when oil refiners sell petroleum products at prices that are lower than the cost of production, which crucially hinge on world crude oil prices.
The government plays the role of a gatekeeper as well: it limits the pass-through effect of rising world crude prices on retail pump rates. However, Reliance Industries and Essar Oil don’t receive any subsidies to cushion the impact that fixed prices for petroleum products can have on their profit margins. Both companies have been calling for a level-playing field for a long time now.
In May 2006, Reliance Industries broke with tradition and decided to fix its retail prices for petrol and diesel at one rupee more than that charged by state-owned refiners. But there was a downside in that: sales from its 1,400 retail pumps across the country fell sharply.
The Planning Commission feels the government should stop intervening in pricing of petroleum products and only provide subsidies targeted directly at certain beneficiaries.
It has also made a strong case for full competition at the retail level since the administered pricing mechanism was officially dismantled in 2002. The Planning Commission reckoned that competition would reduce the need for subsidies and would also lead to lower prices.
It argued that if the government continued to exercise control over the sector and this resulted in the payment of compensation to public sector oil companies, the same benefit should be made available to the private sector companies.
Sources say the petroleum ministry hasn’t crystallised its views on either proposal. Private sector players are keen to see a level-playing field as the present system of compensating only state-owned companies has badly crimped their margins.
“We have made huge investments in retail outlets. Therefore, the issue of getting the same benefits is extremely significant,” said an official from one of the companies.
Via: The Telegraph
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