Oil Subsidy

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Oil sector in India and Role of subsidy
There exist curiosity among common man about petro product pricing, reason for price fluctuations and government’s role in the sector. People are also confused about What is ‘under recovery’ and If Oil Marketing Companies (OMCs) are shouting about their bleeding financial situation than how are they making profits and distributing dividend. Let’s try to demystify the scene.
Firstly let’s understand that currently only PDS kerosene, domestic LPG and diesel are regulated product. Petrol, ATF, industrial LPG and other petro products are deregulated. The pricing of the regulated products are set by the government. OMCs are free to decide pricing of all deregulated products.
Since today 80% country’s oil requirement is imported, any price fluctuation in the global oil price directly impacts the petro product costing. The under recovery for any product is the difference between the benchmark price of the product (based on the import price of the same) and price charge to dealer by OMCs. The product is not imported actually but crude oil is imported and refined here but to calculate under recovery the import price is taken as bench mark. Presently all regulated products are sold below their bench mark prices. The under recovery is Rs 12 for diesel, Rs 30 for kerosene and Rs. 396 for the LPG. Higher the crude oil prices, the higher the product (refined product such as diesel etc) price in international market and higher the under recoveries.
OMCs are compensated for the under recoveries in selling of regulated products in two ways, Budgetary support from government of India and discount offered by upstream oil companies like ONGC, GAIL and OIL. For example for the year ended march 2012 HPCL has received Rs. 18,343 crore budgetary support from GoI and Rs. 12,080 crore discount from the upstream companies. This amounts to around Rs. 30,000 crore of compensation. The company has made PBT of just Rs 4940 crore.
Upstream oil

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