INDIA TAKES A BATH IN OIL SUBSIDIES

June 12, 2008

One of the largest distortions in the energy industry today is the widespread use of state subsidies to decrease prices for consumers in India, Venezuela, China, Taiwan and beyond, says Manjeet Kripalani of BusinessWeek.  These state subsidies, while lowering prices for consumers, are rapidly running oil companies into bankruptcy.

For example:

  • The Indian government has insisted that its oil companies subsidize all the gasoline, diesel and cooking oil it sells, so much that prices are a third cheaper at the pump in India than they are in the United States.
  • Since the oil that Indian companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum purchase abroad is so much more expensive than what it sells at home, the companies lose money every time they makes a sale.
  • Although Indian Oil is India's largest state-controlled refiner of oil, with $59 billion in revenue, they are running losses of $76 million a day, and will run through their line of credit of $21.4 billion by July.

To defuse the crisis:

  • The government of Prime Minister Manmohan Singh raised fuel prices an average of 13 percent on June 4.
  • This is still not enough to rescue Indian Oil, but it has already kicked off a political storm.
  • India's Communists and opposition groups are calling for nationwide strikes to protest the price hikes.

India, lacking the political courage to terminate the subsidies in an election year, may instead attempt to cut subsidies cent-by-cent over the next year to mitigate the political fallout, says Kripalani.  However, those cuts may prove too little to save India's oil companies, and too much for Indians accustomed to cheap fuel. 

Source: Manjeet Kripalani, "India Takes a Bath in Oil Subsidies," Business Week, June 16, 2008.

For text:

http://www.businessweek.com/magazine/content/08_24/b4088036744478.htm

 

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