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Are you ready for second diesel price hike?

, October 9, 2012, 1 Comments

Second hike in diesel price within months would be a surprise for an economy fighting with inflation, misaligned goals by unstable Government and falling currency. However the first one was no surprise when you look at details in Oil and Gas industry.

Hardly was there a choice other than increasing petroleum product prices, we will not be surprised if second one was hovering near vicinity should people of India don’t respond to growth reforms.

Diesel Fuel in general is any liquid fuel used in diesel engines. The most common is a specific fractional distillate of petroleum fuel oil. Heavily used in transportation, where it fuels locomotives, heavy trucks, and construction equipment, it is a refined as one of many substances from crude oil.

Out of the total domestic production in India of all types of petroleum products, high speed diesel oil accounted for the maximum share (41%). Therefore it is necessary to understand the dynamics of crude oil, from economy point of view if not in depth right from drilling wells.

India is a net importer of crude oil importing almost 70%+ of it’s demand. With increasing refining capacity petroleum products are produced in a quantity that as of today, India exports more than it imports petroleum products. This also indicates growing demand of crude oil in India.

Table 1 shows increasing consumption of crude Oil and production almost being flat year over year. Imports have been rising and almost doubled as compared to year 2006-07.

Indian Government provides subsidies for various commodities. Diesel being one of them, its price is therefore regulated leaving a room to increase prices should the deficit go out of control. Analyzing the subsidies on petroleum products, it has grown almost 5 times as compared to 2007 – 08. Out of total subsidies provided, Petroleum products alone accounted for 23.38%.

Investment in Petroleum and Natural Gas sector has declined since 2006 – 07 almost by 50%. Annual growth of FDI in this sector has also not been very exciting, showing huge fluctuations.

With Rupee touching low of 55 per USD, imports were hurting Oil companies pulling losses in millions. Price hike was a natural choice to apply a quick fix. My only fear is repetition of this quick fix will be inevitable if Rupee fails to strengthen and all other dynamics act against oil sector.

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