India's Oil Marketing Firms Face Financial Strain Amidst Global Crude Price Fluctuations
Financial Challenges for State-Run Oil Companies
India's state-owned oil marketing companies are currently experiencing significant financial pressure due to ongoing volatility in global crude oil prices, despite maintaining a freeze on retail fuel prices. Companies such as Indian Oil Corporation, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation have not altered petrol and diesel prices since April 2022, even as the global crude market has seen considerable fluctuations. This decision has led to substantial losses, now estimated at Rs 18 per litre for petrol and Rs 35 per litre for diesel, as reported by sources.
Although fuel prices were deregulated years ago, these companies have opted not to adjust retail prices, absorbing the impact of changing crude costs. The oil market has been unstable, with prices soaring above $100 per barrel following the Russia-Ukraine conflict, dipping to around $70 earlier this year, and then rising again to approximately $120 due to geopolitical tensions involving the US and Israel's actions against Iran.
Daily Losses and Government Interventions
During the peak of the recent crude price surge, the combined daily losses of these oil firms reportedly reached nearly Rs 2,400 crore. However, this figure has since decreased to about Rs 1,600 crore per day after the government implemented a reduction in excise duty by Rs 10 per litre on both petrol and diesel. Instead of passing on these savings to consumers, the companies retained the benefits to mitigate their losses.
The financial strain has wiped out profits accrued earlier in the year, with projections indicating that the January to March quarter may conclude with losses for these firms. A report from Macquarie Group emphasized the gravity of the situation, estimating that at current petrol-diesel pricing levels of USD 135-165 per barrel, India's oil marketing companies incur losses of Rs 18 and Rs 35 per litre on petrol and diesel, respectively. Furthermore, every $10 increase in crude prices adds approximately Rs 6 per litre to these marketing losses.
Potential Price Hikes and Economic Consequences
The brokerage firm has raised concerns about the likelihood of fuel price adjustments following elections in states such as West Bengal and Tamil Nadu, suggesting that higher pump prices could be anticipated post-elections in April.
India's heavy reliance on crude oil imports, sourcing nearly 88% of its needs by 2025, makes it particularly susceptible to global price fluctuations. A significant portion of these imports comes from the Middle East (45%), followed by Russia (35%) and the United States (6%). While India exports refined petroleum products like petrol, diesel, and aviation turbine fuel, rising crude prices pose risks to both fiscal stability and external balances. Even a complete removal of excise duty would not fully alleviate the current losses faced by oil companies, and further tax reductions could strain government finances. Eliminating excise duty entirely could result in an annual revenue loss of around $36 billion, potentially exacerbating the fiscal deficit.
Uncertain Future for Oil Marketing Companies
The contribution of fuel excise duties to government revenue has been steadily declining, diminishing its role in fiscal support. Rising crude prices are expected to widen the current account deficit, which could reach approximately $20 billion by early 2026. Earnings visibility for oil marketing companies remains uncertain, with estimates suggesting that every $1 per barrel change in crude prices affects EBITDA by about 5%. The sector's break-even point is estimated at $80–85 per barrel, making the current pricing environment particularly challenging.
Given these challenges, Macquarie Group has expressed a preference for utilities over oil marketing companies in the near term, citing ongoing uncertainty and margin pressures.