With global crude oil prices once again flirting with the $100 a barrel mark, many Asian countries are faced with the issue of providing subsidized fuel prices for their developing economies. While the Gulf countries dollar pegs offer a respite to the problem, Asian majors have to roll back the mounting subsidies. India sets the retail prices of fuels such as petrol and diesel, below the market prices in order to protect the incomes of poor. As such oil refiners with retail arms are incurring heavy losses as global oil prices have surged to new record highs. The upstream oil marketing companies are losing around Rs. 300 cr per day on sale of petrol, diesel, LPG and kerosene at subsidized prices.
To compensate the state-owned Oil Marketing Companies (OMCs) for selling fuel at subsidized prices, the government compensates oil, fertilizer and food companies by issuing them bonds every quarter for the past few years. The government issues oil bonds to the state-run oil firms, who can sell them in the market. Oil bonds can be defined as securities issued to the petroleum marketing companies in lieu of subsidy payments from the government and are intended to partly offset refiners under recoveries. Government absorbs the cost of all the subsidies directly and passes them on to the upstream oil companies by issuing oil bonds to offset their losses. The government does not issue oil bonds to private companies.
Declining dollar is not favorable for oil-producing countries as it lowers their earnings. The dollar decline and speculations over further rate cuts by the US Federal Reserve have boosted global oil prices. Revenue loss of the retailing companies, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) is estimated to be Rs. 77,304.50 cr in 2007-08. Thanks to the government's oil bonds, the oil companies have been managing to stay afloat. Yet, under-recoveries are impacting their finances leading to high liquidity problems and heavy debt burdens. |
