Crude Oil Price Battle of Karnataka: Is it an Election Effect?

Oil-marketing companies (OMCs) in Karnataka have started recovering their revenue loss by hiking prices of petrol by 17 paise and diesel by 21 paise. The freeze on retail prices since April 23, however, meant that the OMCs had to let go up to Rs 350 million per day, according to a published media report in Business Standard based on the average consumption of both fuels.

The losses increased gradually — a rough estimate shows the markets suffered a revenue loss of more than Rs 200 million per day in May, which for 19 days cost them about Rs 3.8 billion. On an annualised basis, a Rs 1 reduction in margin results in a Rs 130 billion annual shortfall in OMC revenues. Sources said the companies would recover the loss in the coming weeks through successive upward revisions. OMCs may hedge for a bigger retail price hike this time to the tune of Rs 1.5-2 per litre over two to three weeks, they said. Crude oil prices rose 3 per cent from January to March and OMCs raised retail prices by about 5 per cent during the time.

But from April 1 to May 13, when oil prices rose 18 per cent, OMCs increased retail prices by a mere 1-2 per cent.

Since the retail prices were frozen, Indian Oil Corporation’s (IOC’s) marketing margins reduced from an estimated Rs 3.4 per litre to Rs 0.6 per litre for petrol and from Rs 3.8 per litre to Rs 0.8 per litre for diesel, according to the analysis.

Due to the assembly elections, the government avoided any rise in fuel retail prices; not by reducing its own revenue stream by cutting excise duties, but by squeezing the margins of state-owned OMCs.