Crude oil effect: LPG, diesel hikes on cards

The government will come under intense pressure in the days ahead as runaway inflation rears its head.

Rising demand for petrol and diesel from US car owners, and Chinese and Indian manufacturers have stoked demand to a point where crude oil closed above $90 on the New York Mercantile Exchange on Wednesday, for the first time since October 2008 after prices fell in the global recession. The price of crude had held above $80 for most of 2010.

Citi Futures expects crude-oil prices to rise to $93 a barrel in 6-12 months. Some analysts have even projected that the price could pop above $100 a barrel again in 2011.

The Paris-based International Energy Agency said global demand grew 2.9% to 87.45 million barrels a day in 2010.

The agency forecast a further expansion in 2011 to 88.77 million barrels a day.

With rising global crude oil prices, all eyes are now on a meeting of the empowered group of ministers in Delhi on December 30.

The government is likely to consider raising diesel and LPG prices in a move that could spark inflation, but would ease the burden on state oil retailers saddled with keeping prices low.   

Finance minister Pranab Mukherjee is yet to confirm the date of the meeting.

“When the empowered group of ministers decided on June 25 that the price of diesel would be market determined, there was a caveat saying at that juncture the price would be increased by Rs2,” oil secretary S Sundareshan told a business channel.     

“Any change in that figure will have to go back to the panel and that’s what we intend to do,” Sundareshan said.

During the June 25 meeting, the ministerial panel freed up petrol prices and agreed to deregulate diesel prices at a later date. Now the ministerial panel may consider a Rs2 per litre hike in diesel prices to narrow the difference between the domestic retail price of the fuel and its imported cost.

“The under recovery (or the revenue oil companies lose) on diesel today stands at Rs6.09 per litre,” said Sundareshan.

He also pointed out that besides diesel, the state-run oil retailers lose Rs17.72 per litre on kerosene sales and Rs272.19 on every 14.2-kg LPG cylinder.

In a testament to global growth, the world gulped 2.5 million more barrels of oil per day than a year ago, for the second-highest growth in oil consumption since the 1970s.

Although most of the demand growth for crude is coming from the high-octane economies of China, India, hedge funds and investors in US and Europe are also buying up financial instruments tied to the price of crude, thereby pushing up oil prices.