Why are IOC, BPCL and HPCL likely to make losses of Rs.19,000 crore?

Moody’s Investors Services has highlighted that the total combined losses to OMCs like IOC, BPCL and HPCL were staggering at around Rs.19,000 crore. That is largely because for 4 months in succession, the government did not allow price hikes for OMCs in tandem with the crude prices. During this period, the price of crude went up by more than 75%, but retail prices were held at the same level. This has created accumulated losses of Rs.19,000 crore.

The normal practice is that when crude prices go up, OMCs will automatically hike the price on a daily adjustment basis. There are 3 options. Firstly, the entire extra cost can be passed on to the end consumer, which is likely to be inflationary. The second is for government to absorb the loss and subside oil, but the government finances are already stretched. The last option is to put the losses in the books of OMCs, and that is what has been done.

The government looks at the problem differently. Firstly, it feels that oil companies made a lot of money when oil was ging up from $25/bbl to $80/bbl. Even today, their losses on marketing are being offset by the higher value of inventory in the refining business. Hence OMCs can afford to take some of the current cost and defray it against their previous gains. Finally, the price hikes have started now, but it is still painstakingly slow.

If the price of oil stays around $119/bbl, then OMCs would lose $29-$31/bbl on petrol and diesel approximately . That would result in a combined loss of $80 million for the OMCs on a daily basis. Unless the prices are hiked in tandem, OMCs will lose nearly $2 billion each month. OMCs have leeway for daily price hikes, but any large price hike will need the consent of the government. With retail inflation at 6.1%, this model is likely to continue.