-- Posted Friday, 25 June 2010 | Digg This Article
| | Source: GoldSeek.com
The Indian government has said that gasoline and diesel prices will now be market-determined as the federal government seeks to shrink its budget deficit and help state-run marketing companies cut losses on selling fuel products at state-set prices. The deregulation will lead to a INR3.5 per liter increase in the price of gasoline, while the price of diesel will go up by INR2 per liter as of now.
India's reform of fuel pricing is likely to have significant effect on the regional oil products market. It's a game changer for Indian companies. Refiners Reliance Industries and Essar are to compete with state-run firms for retail market share; private Indian refiners typically see better refining margins. Private companies will now compete with state run companies to sell their products.
The Big Rider
But the ministry secretary hints a possible comeback of government controls if and when crude prices surge; the move resembles similar strategy in 2002 when India freed price controls but brought them back once rising crude was affecting the local inflation rate. The secretary says government may intervene in fuel prices if crude prices surge.
EFFECTS
1) Inflation will rise. There is no doubt over the same. In the short term and medium term overall inflation will rise. But in the long term the higher base effect will negate all the rise.
2) Interest rates: Higher inflation will in higher the cost of borrowing. We expect RBI to raise interest rates by seventy five basis points before the end of December.
3) Private sector oil companies and oil marketing company’s margins will rise.
4) Fiscal deficit will be contained but all depend on the monsoon which so far has had unsatisfactory progress.
5) Hedging: Now even a single petrol pump owner will resort to hedging of petrol. For example a petrol pump owner has 10,000 litres of petrol in his stock today (25th June 2010) and say on Monday 28th June petrol prices will be changed. The petrol pump dealer (A) Will sell crude oil futures in MCX or any other commodity exchange if he expects petrol prices to fall on Monday (28th June). (B) If the petrol pump owner sees a short term bottom being formed in petrol prices he will buy crude oil futures in MCX or any other commodity exchange.
Will the common man benefit OR loose from the petrol price deregulation
Initially the common man will stand to loose as higher fuel prices destabilises this monthly budget. A rise in fuel prices implies a rise in the cost of everything without any increase in salaries or income. There will be a marginal fall in short term savings. In the long term when crude oil prices stabilise or stay at low levels for a considerable period of time then the common man will benefit.
Certain Things need more clarification
There is no information after how much time petrol prices will change say every week or a fortnight etc. Unless there a clear view on the same it will be very difficult to give a precise view of the effects. Further, will state run oil marketing companies be free to actually raise prices OR they will be dictated by the whims and fancies of the ruling UPA coalition. I am talking about independence of state run oil marketing companies. I also have my doubts whether diesel will be decontrolled in the future if global crude oil prices break and float over $100 before the close of the year and stay over $100 for a longer period of time.
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-- Posted Friday, 25 June 2010 | Digg This Article | Source: GoldSeek.com
