Transcript Slide 1
A Viable and Sustainable System of Pricing Petroleum Products
The Logic of the Expert Group Report Kirit S. Parikh Chairman, Expert Group Chairman, IRADe; www.irade.org
Feb 2, 2010
Background
India’s Import Dependence – 80% and Growing Volatile World Market Price of Crude oil.
How do we deal with it
Crude Oil (Brent) Price (US$/Barrel)
• •
July ’08 - $ 135.00
July’ 09 - $ 40.00
2
PRESENT POLICIES & CONSEQUENCES
Consumers protected, price not passed through Large UNDER RECOVERIES {=sales-cost} for Oil Marketing Companies (OMCs) shared by Upstream cos. and Govt.
Under recoveries: 2008 to 2009: 103 thousand crore 2003 to 2009: 300 thousand crore Reduced surplus of Upstream cos. – reduced ability to explore Stressed Govt. Finance No incentive to consumers to economise use Private firms left the market, no competition.
Need For Change in Policy
Our consumption is growing and present policy would lead to large under recoveries It is unsustainable: Government cannot bear the cost without upsetting other development programmes.
Consumption of Petroleum Products, 2001-02 to 2030-31
( Million Tonnes)
Actual Consumption Projections Product 2001-02 2004-05 2008-09 CAGR 2002-09 2020-21 2030-31
MS HSD SKO LPG
Sensitive Products Free Industrial Products TOTAL
7.0
36.5
10.4
7.7
61.7
38.7
100.4
8.3
39.7
9.4
10.2
67.5
44.1
111.6
11.3
51.7
9.3
12.2
84.4
49.0
133.4
7.0
5.1
-1.6
6.7
4.6
3.4
4.1
25.4
93.5
7.6
26.6
144.4
73.3
217.0
49.9
153.4
6.5
51.1
226.0
102.6
325.6
Source: PPAC
Total under recoveries of oil marketing companies at different levels of Crude Prices, 2009-10 to 2030-31
Source: PPAC
Viable Long Term Policy
Workable over wide range of international oil prices Meets various objectives of Government Reduces Government’s Fiscal burden Keeps domestic oil industry financially healthy and competitive Reducing fossil fuel use is good for energy security and environment including climate change.
Why control Prices?
1. Protect the poor 2. Provide Kerosene for lighting 3. Provide clean cooking fuel – a merit good {i.e. we want people to consume} because cooking with fire wood and dung causes indoor air pollution, respiratory diseases, eye infection and keeps girl away from school to gather fuel.
Why control Prices? (contd.)
4. Intervene to insulate economy from oil price volatility May cause inflation which may persist even when price comes down No clear evidence that in an open and competitive economy, impact of transient price increase persists
Issues
1.
Difficult to differentiate secular price increase from demand supply forces and transient increase from speculation 2.
Increase energy security for which we need to Keep domestic firms viable Have a competitive petroleum economy
When Crude Price Rises
Some body has to bear the cost a.
If the Government bears it, how does it finance it?
i.
ii.
Taxes – will lead to price rise Fiscal deficit – can cause inflation iii.
Cutting Expenditure –social programmes (funds) which helps the poor get affected.
On whom the burden falls depends on the policies and instruments used Policies are examined from that point of view
Petrol Price Policy
Consumed by the well to do sections – No justification for subsidy
Item of final consumption. Low impact on inflation
Price increase will lead to efficiency and conservation.
Burden depends upon who uses how much Petrol?
Impact of Petrol Price Liberalisation
Petrol price will increase by Rs. 7 per litre when crude price becomes $80 / bbl and by Rs. 23 / litre at crude prices becomes- $120 / bbl Burden on
Two Wheeler Owner Average Consumption Monthly Expenditure (Rs.) Additional Monthly expenditure (Rs.)
$ 70 / bbl $ 80 / bbl $ 120 /bbl 86 litres/year
Car Owner
320 50 160
Average Consumption
593 litres/year
Monthly Expenditure (Rs.)
$ 70 / bbl 2210
Additional Monthly expenditure (Rs.)
$ 80 / bbl 350 $ 120 /bbl 1150
Market Determined Pricing is recommended for Petrol both at refinery gate and at retail level
User-wise percentage share in total diesel consumption, 2008-09
Source: PPAC
Diesel Price Policy
(Burden on Agriculture)
Agriculture (12%)
Diesel price increase will get reflected in MSP (minimum support prices) for major crops Higher Diesel price will lead to judicious use of ground water for irrigation by farmers Government should keep PDS price of food grain constant to poor consumer.
Additional subsidy burden on PDS would be 1/8 th due to present diesel policy
Diesel Price Policy
(Others)
Trucks (37%), Industrial (10%), Power Generators (8%)
Truck owners hike fares due to high economic growth Diesel Consumption for a 9 ton truck for Delhi-Mumbai round trip is Rs. 22000/-, about 50% of the total fare Higher Diesel prices will lead to freight shifting from Road to Rail (which uses 1/4 th as much diesel as Trucks) Higher Diesel prices will result in efficiency Total pass through of cost means an increase of Rs. 4/litre which means an additional Rs. 20,000 crore of diesel cost borne by truckers, industrial users and power generators which in only 0.4% of GDP (2008-09) Inflationary impact of subsidy will be comparable with the above.
Diesel Price Policy
(Passenger Cars)
Passenger Cars (15%)
Like petrol users, there is no justification to subsidize diesel car owners
Market Determined Pricing is recommended for Diesel both at refinery gate and at retail level
Additional Excise on Diesel driven Cars
Petrol has a higher excise duty than diesel. Diesel car owners escape this.
At the present excise rates, the additional excise duty paid by a urban petrol vehicle owner who on an average drives 5000 KM/year and gets an average mileage of 13.5 KM/litre is around Rs.10000 per year.
The present discounted value at 10% discount rate over the 10-year life of a vehicle would be around Rs. 67,500.00 and at 5% discount rate it would be Rs. 81,000.00
At the present rates and at discount rate of 5 per cent, a differential excise duty of Rs. 80,000 should be levied on diesel driven vehicles
Kerosene Use
It is a bare necessity for lighting, in households without electricity.
Kerosene Subsidy to poor households is justifiable. Should be effectively targeted through smart cards Only 1.3% of rural households use kerosene for cooking (2004-05 stats) Among the poorest four deciles, less than 1% used it for cooking but 60% used it for lighting (2004-05 stats).
The average rural household in the poorest decile spends around 2 per cent of its monthly expenditure on kerosene.
The expenditure on kerosene is only 13 % of its discretionary expenditure.
There is scope to raise kerosene price The LCD lighting system can substitute lighting by kerosene.
PDS Kerosene – Rationalize Allocation
Average per capita kerosene allocation in high income States in 2007-08 was 14.1 litre which was 41% higher than that of the low income States.
53% of households in high income States have exited PDS kerosene since 1999-2000, as compared to 24% in low income States.
Average reduction in allocation from 1999-00 to 2005-06 is only 12.8% while 32.6% of households exited from PDS Kerosene during the same period. Subsequently 2.4 crore BPL households have been provided subsidized Electricity connections under RGGVY Need for immediate reduction in allocation of PDS kerosene by 20% Need for periodic reduction in allocation based on the progress of RGGVY
Kerosene Consumption
Expenses on PDS Kerosene consumption, Discretionary items and Total household consumption (Mean Values) Quantity of Kerosene Consumed @ (Litre) Expenses (Rs.) Decile
Only from PDS Only from Other Sources From both Sources * On PDS Kerosene On discretionary items # Total household consumption
RURAL
1 5 10
Total
2.7
3.3
3.4
3.3
2.2
2.7
3.6
2.8
4.8
5.6
6.8
5.7
28.4
33.4
34.9
211.1
343.9
991.8
1,386.6
2,222.5
5,872.1
1 5 10
Total
4.0
4.5
3.9
4.2
3.4
5.2
4.6
4.6
URBAN
7.4
10.1
9.2
9.5
41.0
49.1
42.2
335.7
642.1
2524.4
2,016.0
3,444.5
10,014.6
@ The figures relate to different categories of households.
#
Discretionary items include entertainment, personal effects, toilet articles, sundry articles, consumer services and conveyance.
Source: NSSO Survey ( Note 4, Appendix)
Kerosene Price Policy
PDS Kerosene price has remained at around Rs.9 per litre (at Delhi) since 2002 The under-recovery on kerosene has grown from Rs. 3,751 crore in 2003-04 to Rs.28,225 crore in 2008-09.
Large difference between prices of diesel and kerosene, and between kerosene price in India and neighboring countries lead to lot of diversions and smuggling.
There is need to raise price of Kerosene.
Unequal allocation of PDS Kerosene in States
Allocation of PDS Kerosene 60 50 40 30 20 10 0 High Income Middle Income Low Income
Per Capita Net State Domestic Product, 2005-06 (‘000 Rs) Per Capita Kerosene allocation 2007-08 (Litre)
•
High Income
: Chandigarh, Goa, Delhi, Pudicherry, Haryana, Maharashtra, Punjab, A& N Islands, Gujarat, Himachal Pradesh •
Middle Income
: Kerala, Tamil Nadu, Karnataka, Andhra Pradesh •
Low Income
: West Bengal, Mizoram, Tripura, Uttarakhand, Arunachal Pradesh, Meghalaya, Manipur, Jharkhand, Assam, Orissa, Madhya Pradesh, Uttar Pradesh, Bihar.
Source: Col.2: Economic Survey, Govt. of India ,Col.3: PPAC, Col.4: NSSO Surveys of Household Expenditure, Col.5: PPAC Col.6: Derived by subtracting Col.5 from Co.4 (figures may not exactly match due to aggregation and rounding off data)
Raising Kerosene Price
If price is raised by the same percent as rural per capita income has increased since 2002, the burden would be same as in 2002.
We take increase in per capita agricultural GDP as a proxy for rural income, which would have increased by more.
During 2002-03 to 2009-10, the per capita agriculture GDP at current prices has increased by around 66% from Rs 4470 to Rs 7910. Price of PDS kerosene could be raised by 66% to reach a level of around Rs. 15/litre without putting undue burden on the poor.
Recommend that price of PDS kerosene be raised by Rs.6/litre from Rs 9/litre to Rs 15/litre and should be revised every year in step with per capita agricultural GDP at nominal prices.
Pattern of LPG Consumption
Present Subsidy is Rs 285 per Cylinder of 14.2 kg Total LPG Subsidy (Rs. Crore) 2003-04
5,523
2008-09
17,600
2009-10(Est)
14,152 Households Poorest 40% Middle 30% Richest 30%
Who gets LPG subsidy (percent of Total LPG) Rural
0.6
3.5
20.9
Urban
11.4
24.4
39.1
(NSSO survey of 2004-05 ) In 2004-05, 57% of urban but only 8.6% of rural households used LPG.
Top 3 decile in urban areas, some 22 million households, use nearly 40% of LPG In the long term LPG distribution to the targeted group through UID/Smart Card
Expenditure on LPG and Cylinders Used
Mean Monthly Expenditure on LPG by LPG using households over 30 days (Rs.) and implied quantity (cylinders) Decile Mean Monthly Expenditure on LPG (Rs.) Rural Urban Mean Total Household consumption expenditure Rural Urban No. of 14.2 KG cylinders / year Rural Urban
Poorest 1 st 2 3 4 5 6 7 8 9 Richest 10 125.2
163.7
153.1
145.9
176.6
189.1
179.9
185.0
189.0
196.1
205.9
222.1
234.9
239.1
245.0
255.3
248.7
255.2
256.9
250.0
1501.8
2928.6
2367.7
2369.5
2793.3
2952.0
3111.7
3493.5
3971.5
6597.5
2378.0
2816.8
3132.3
3542.6
3853.1
4390.9
4677.8
5270.0
6304.2
5.17
6.62
6.18
5.98
7.09
7.53
7.27
7.41
7.56
8.17
9.10
9.35
9.60
9.79
10.29
10.19
10.17
10.37
10818.8
7.91
10.17
Source: NSSO Survey(Note 4, Appendix)
Long Term LPG Policy
Subsidized LPG for poor consumers Target effectively through smart card/ Unique Identification system
Revising LPG Price
Expenditure on LPG was less than 10 per cent of their total consumption expenditure in 2004-05.
The per capita urban GDP during 2003-04 to 2009-10 has increased by 84% from Rs 89,000 to Rs 1,48,500 If Price of domestic LPG cylinder, is raised from the base price of Rs. 262/cylinder in 2003-04 by 85% to Rs. 485/cylinder in 2009-10, then the burden of LPG expenditure be at the level of 2003-04.
The price of 14.2 kg LPG cylinder should be raised by at least Rs. 100 per 14.2 Kg cylinder.
Subsequent increase should based on increase in per capita GDP
LPG Rationing
We do not recommend rationing as it would be difficult to enforce, create an inspector raj and will not arrest diversion.
In any case, Rs 100 increase is equivalent to ration of 6 cylinders at the level of cylinder use in most urban households.
Reduction in under-recoveries due to recommendations
Product Measures Annual Financial Impact (Rs. Crore) At 2009-10 level of Under recoveries
- Petrol - Diesel No under-recovery No under-recovery - PDS Kerosene a) Reduction in allocation by 20% - Domestic LPG
Total
a) Increase in price by Rs.6/- on the reduced quantity Increase in price by Rs.100/Cylinder Note: Audited figures for April-December 2009 and estimates for January-March 2010.
5,103 8,894 3,484 5,390 7,580
30,451
Up-Stream Companies Contribution
ONGC and OIL were allotted blocks on nomination basis A portion of their incremental income from production from these blocks should be able to set off some under-recoveries The following is the suggested schedule
Price Range ($/bbl) 60 – 70 70 – 80 80 – 90 Above 90 Rate of Tax (% of the incremental price) 20 % 40% 60% 80%
i.
ii.
iii iv v vi vii
Remaining Under-recoveries
Table UR 2: Financing of Under-recovery of PDS Kerosene and Domestic LPG Crude Oil Price level($/bbl) Sale Volume - PDS SKO (Million KL) 70 11.7
80 11.7
100 11.7
Sale Volume - Domestic LPG (Million Cylinder) 788.3
788.3
788.3
120 11.7
788.3
Under-recovery per Unit of PDS SKO & Domestic LPG 17.4
20.7
PDS SKO (Rs./Litre) 27.4
34.1
Domestic LPG (Rs./Cylinders) PDS SKO (Rs. Crore) Domestic LPG (Rs. Crore) Total (i+ii) 140 11.7
788.3
40.7
206.0
Total Under Recovery 20300 16200 36500 43500 244.4
24200 19300 57300 321.4
32000 398.3
39800 475.2
47500 25300 71200 31400 85000 37500 Measures to reduce under recovery 4100 4800 Reduction in SKO allocation by 20% 6400 8000 9500 Increase in Price of SKO by : Rs. 6 / Litre Increase in Price of LPG by : Rs. 100 / Cylinder Sub-total: If all three measures adopted (iv+v+vi) viii ix x xi xii Balance Under recoveries after (iii-vii) Contribution by upstream oil companies Under recoveries remaining (viii-ix) Subsidies provided through budget * a.
PDS Kerosene a.
Domestic LPG Total (a+b) Total to be financed by Government Budget (x+xi) 19780 6100 7600 17800 18700 1660 17040 6100 7600 18500 25000 4980 20020 6100 7600 20100 37200 16600 20600 6100 7600 21700 49500 29880 19620 6100 7600 23200 61800 43170 18630 960 1780 2740 22760 960 1780 2740 23340 960 1780 2740 22360 960 1780 2740 21370 960 1780 2740
Viability of Recommendations
The under recoveries to be financed by the Government from its budget remains constant at around Rs 20000 crores over a wide range of crude price Oil Marketing Companies (OMCs) have no under recoveries left uncompensated Upstream companies have enough surplus to invest in exploration and expansion Freeing petrol and diesel creates a competitive level playing field for all players, public and private Will lead to a healthy and competitive oil industry
Impact of Recommendations on Inflation:
Less than present policies Burden may fall on richer classes Burden on poor will be less than that of present policies Reduction in subsidy will lower misuse, and enhance consumption efficiency
Additional Impacts
1.
Energy Security:
Financially strong and globally competitive oil industry provides an enduring platform to strengthen energy security Leads to efficient usage of fossil fuel
2. Climate change/ GHG/ Environment:
Reduction of wasteful emission of GHG
3. Fuel Conservation
: Fuel conservation, as increase in price reduces the unnecessary and easily avoidable consumption Conservation leads to extended time of usage in limited capacity reservoirs Motivates to use improved energy efficient technologies and equipment