EDITORS BLOG AS ON 24TH june;2011

Rising Oil Price

Oil is the most traded commodity in the world. Since the beginning of this year there has been a rise in the crude oil price majorly due to unrest in Egypt and Libya, reducing the supply of crude oil. Price went as high as $127 a barrel this year. Organization of Petroleum  Exporting Countries (OPEC) failed in its meeting this month to raise the supply of Crude Oil to bring down the prices. On June 23rd International Energy Agency (IEA) said that it would supply 60 million barrel of crude oil from its reserve starting next month. This brought down the crude oil prices in International market to $107 a barrel for Brent oil and $90 a barrel for WTI.
Indian Oil companies are facing a loss of 456 crore daily due to rising crude oil price, the total amounting to 1,71,140 crore for the fiscal year 2011-12. For every liter of diesel sold the companies are losing 15 rupees and 27 rupees for a liter of kerosene leading to such under recovery.  The oil company made to proposal to distribute these under recovery equally among public, government and the companies.
Considering these under recovery The Empowered Group of ministers (EGoM) meet on 24th June to find out a solution to the under recovery. After the meeting the government decided to raise the diesel price by 3 rupees. The LPG cylinder will cost 50 rupees more and Kerosene is raised by 2 rupees. The government has also eliminated custom duty on import of Crude oil. This elimination of duty will cost the government a loss of 26000 crore. The government further reduced the excise duty from 4.60 rupees a liter to 2 rupees a liter. This reduction will cost 23000 crore loss in revenue to the government of India. Seeing the under recovery this is a real modest increase in prices. Even after these hikes the under recovery will amount to Rs. 120000 crore, some of that will be borne by the government and some by the companies.
Diesel price has been raised almost after a year, one should note that the oil price a year ago was 72$ a barrel however now the price is hovering around $100 a barrel so these price hike should be seen as nominal.
Rising inflation was the main concern to keep the hikes as low as possible. However with increase in price it is surely going to have a toll on inflation. With these hike inflation is expected to increase by another 50 basis points. With further rise in inflation there will be further increase in interest rate by RBI this will bring down the industrial growth and slowdown the economy so now we find our economy trapped in a vicious cycle.
The government of India has taken a huge load of under recovery on its self and it is definitely going to raise fiscal deficit for the current fiscal year. The government has also asked the state government to reduce tax on oil and gas to further reduce the under recovery.   Impact of these hikes on RBI policy and inflation and economy will be much debated.