NEW DELHI: Iran's escalating tensions would make an increase in the prices of motor and kitchen fuels inevitable after the polls as international crude hit a six-month high of near $120 a barrel on Wednesday.
London Brent crude was up $1.28 to $118.63 a barrel after touching a high of $119.99, the highest intra-day price since August 1. US crude was up $1at $101.74 at the time of reporting.
Analysts said supply concerns outweighed worries over the health of global economy. News agencies said prices jumped after Iran's Press TV reported the country had banned exports to six EU countries in retaliation for European sanctions against Teheran. The prices only came down after Iran's oil ministry denied the report.
For India, the Iran crisis has two aspects - supply and price. India buys 12% of its oil from Iran. In case Iranian oil stops flowing - though FM Pranab Mukherjee had recently said in the US that India could ill afford such a step - alternative supplies can be managed, though with some short-term difficulty.
But a spike in crude prices at this juncture would leave the government little option but to allow state-run fuel retailers to raise pump prices of motor fuels as soon as the polls get over. The finance ministry is struggling to make both ends meet and is left with little appetite for higher subsidy bill.
The government had informally asked the fuel retailers not to raise prices since January to avoid sparking popular anger ahead of the polls in five key states. While the retailers managed to post profits in the third quarter on the back of discounts from domestic oil producers and dole from the government for losses on kitchen fuels and diesel, they were still taking a hit of Rs 3 per litre on petrol.
Officially petrol has been deregulated since June 2010. But in practice, its pricing too is informally dictated by the oil ministry which does not compensate any loss on the fuel since it is deregulated. Market leader IndianOil lost about Rs 443 crore since the last revision in petrol price on December 1. The company is losing Rs 11.35 on a litre of diesel, Rs 28.76 on kerosene and Rs 378 each cooking gas refill.
These figures are already untenable for the companies and would further rise with any increase in global oil prices. Even oil minister S Jaipal Reddy has admitted as much and hinted at taking steps to "reduce the subsidy burden".
At the end of their tether, the companies have asked the government make up the losses they suffered on petrol for not raising its price since January. "We have informed the government we have no more capacity to absorb the losses (on petrol)... The ministerial panel's decision (in June 2010) to deregulate petrol also came with the provision that the government can intervene if prices rise beyond a point... Petrol price has shot up to $127 per barrel in the international market from $109 when the price was last revised," IndianOil Chairman R S Butola had said on Monday.
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