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Wednesday, November 14, 2007

India Determined Not To Hike Gas Prices

MUMBAI - The Indian government’s decision not to hike gas and diesel prices, despite crude oil nearing $100 a barrel, is likely to deepen the losses of state-run refiners, which are maintaining prices at artificially low rates.

Ahead of state- and national-level elections, the Congress-led coalition is reluctant to pass on rising crude prices to Indian consumers. Last week, Prime Minister Manmohan Singh said the government needed to “restructure” subsidies in food, fertilizers and oil, which are expected to touch $25 billion this year. India’s crude oil "basket" (the cost of importing a blend of Brent sweet crude and Oman-Dubai sour-grade crude) is hovering at approximately $89 a barrel.

But on Tuesday, Petroleum and Natural Gas Minister Murli Deora spoke about a proposed price hike: “The objective is not to burden the aam adami (common man). It is some weeks [away]. It is not being done today.” A decision on prices will happen at an “appropriate time.”

Analysts say the government is unlikely to alter prices significantly before national polls in May 2009.

“We could see a reduction in import duties over the next few months, from the present levels of 5.15% to around 3%. They cannot allow these companies to bleed so much that their net worth gets washed [away],” said Niraj Mansingka, an energy analyst at the Mumbai-based brokerage Edelweiss Capital.

The three principal state-run companies-- Bharat Petroleum, Indian Oil Corp. and Hindustan Petroleum Corp.--took losses of 132.6 billion rupees ($3.37 billion) last quarter, Mansingka said. Indian Oil, with close to 50% of the market share, suffered the heaviest losses.

Reliance Industries and Essar Oil are the two private sector companies that manufacture and market gasoline and diesel. Reports from across the country said both companies had raised rates by between 1 rupee and 5 rupees (3-13 U.S. cents) per liter. Though neither company officially confirmed the hike, their spokespersons said they were making heavy losses because of an absence of state subsidies.

The government hasn’t allowed state-run companies to hike prices this entire year. If the entire rise in oil prices were passed on to consumers, inflation could jump by an estimated 1.5 percentage points. (See: “ Inflation Cools In India”) The central bank wants to keep inflation below 5% this year.

State-run refiners are reportedly expected to meet a third of the increase in costs, while the government will subsidize the rest. The appreciation of the rupee, which has soared more than 12.5% against the dollar this year, helped mitigate losses. Crude prices increased around 16% in the same period.

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