Oil worries again


A hike in petroleum prices is now inevitable, and presents a bleak picture of all-round inflation, but there's good work happening in India on researching fuel alternatives  

What is India News Service
26 April  2005

With Finance Minister P Chidambaram turning down Petroleum Minister Mani Shankar Aiyar’s request for a cut in excise duty on petroleum products, the dreaded hike in prices came another step closer.

The petroleum ministry is seeking an increase of Rs 2.50 a litre on petrol and Rs 1.30 a litre on diesel.

The oil ministry says a Rs 2.20 hike on petrol and a Rs 1.06 hike on diesel are necessitated by an increase in duties, and the rest by the process to produce cleaner fuel (Rs 0.30 a litre for petrol and Rs 0.24 per litre for diesel). The oil companies want to pass on this burden to consumers.

By slashing excise duty as demanded, the finance ministry will stand to lose Rs 5,460 crore on crude oil alone.

Not that it is very easy for the present government to pass on the hit to the consumer. The UPA government will first have to consult its allies and the Left parties before taking a decision on the price hike of petroleum products. After his efforts to get Chidambaram to cushion the hike failed, Aiyar said he would talk to the Left. “I will consult our allies and left party leader Sitaram Yechuri before taking the price revision to the Cabinet," he told reporters.

The petroleum industry has been demanding a hike because of a hike in excise duties and the imposition of an additional cess. The hike in international prices of petrol and diesel also has been cited another reason. Chidambaram is reconciled to the fact that growth prospects will be dampened.

While refineries are able to pass on higher crude prices, sticky retail prices (capped by implicit governmental control) imply that margins for the integrated refining and marketing companies, that is for BPCL, HPCL and IOC, will be squeezed.

Officials usually put on a brave front saying the Indian economy is resilient enough to absorb the oil shock, it is clear petro inflation will adversely impact India’s growth prospects.

In all the clamour we forget that good work is being done right here in India on finding alternatives to fossil-based fuel. Bio-diesel is an option. A test drive in Pune reported that it gave a smoother ride than the regular fuel, emission was 70 per cent lower, and there was significantly lesser noise and vibration. With modifications that cost just Rs 2,000, regular vehicles can be made to run on bio-diesel. The conclusion: Bio-diesel fulfils all the technical specs; the question marks relate to the logistics of availability and price.

In Faridabad on the outskirts of Delhi is the 65-acre R&D centre of Indian Oil Corporation (IOC). Inside the lush green campus, scientists are working in partnership with Mahindra & Mahindra (M&M) to create the country's first hydrogen-powered vehicle. But the production of pure hydrogen -- the most plentiful element on earth -- for fuel is not easy.

The present method of producing hydrogen from water through electrolysis is very expensive and, therefore, not financially viable on a large scale. Similarly, the production of hydrogen from solid biomass is also too expensive to make mass production viable.

Meanwhile, an exclusive team of engineers and scientists at Tata Motors' Engineering Research Centres in Pune and Jamshedpur is working on an ambitious project to develop a zero-emission fuel cell-powered bus as well as a hybrid electric car.

Also in the works are a bio-diesel-fuelled Indica and a project-in collaboration with IOC-to evaluate the impact of 7 per cent and 10 per cent ethanol on LCV 79, a commercial vehicle, Sumos, and Safaris. Ethanol is oil, distilled from sugarcane in India, and corn and rapeseed in other parts of the world, which can be used to power internal combustion engines.

Bajaj Auto has also jumped on to the alternative fuel bandwagon. It launched ecorick, an electric battery-driven auto-rickshaw, last month and hopes to sell around 1,200 vehicles by September. "The new vehicle, which costs Rs 1.5-1.6 lakh, is 50-60 per cent more expensive then the ordinary auto-rickshaw. But over a five-year life cycle, it will be 10 per cent cheaper," says Tapan Basu, General Manager (Electric Vehicles), Bajaj Auto. But the company will have to contend with difficulties related to recharging of batteries, proper infrastructure and the higher initial price.

All this should come as heartening news, considering the gloomy scenario our dependence on crude imports paints. Vinay Jaising, oil analyst at Morgan Stanley, believes that the subsidy burden in the system on LPG and kerosene alone would be something like $4.5 billion for FY2005. In the budget, the government has set aside Rs 35.6 bn as its share of the LPG and kerosene subsidy, implying that the balance would have to be borne by oil companies.

PSUs have lost Rs 3,160 crore this fiscal on selling diesel and petrol below the import cost. Upstream companies benefit from higher prices, the impact on the downstream sector is mixed, depending on the degree of pricing power.

The Indian economy’s high oil intensity (2.8 X that of the US) and inordinately heavy reliance on imported crude (71 per cent of total requirement) makes it vulnerable to any external oil shock. CLSA, in its latest report on the oil scenario, suggests that with the onset of winter in the northern hemisphere, and if oil prices sustain at $50 plus per barrel for the rest of the financial year, GDP growth will be eroded by 1.5 ppt and inflation could rise by 4.8 ppt (if the government were to abstain from controlling retail oil prices).

Further if crude prices average $60/bbl in FY06, 3 ppt will be shaved off India's GDP growth and inflation could rise 3.5 ppt due to the direct and indirect effects.


1. India: Oil crisis looming large, The Energy Bulletin
http://www.energybulletin.net/2873.html