It is the gap between the local price of fuel and what would have been the price if the fuel were imported. e.g. Let's assume Indian companies import crude oil at $100 and after refining, oil's total production cost becomes $110. The cost of refined oil in international market is $115. Now if Indian companies sale the refined oil at $110 then they arent actually at loss, but there is an underrecovery of $5.
Is under-recovery the same as loss?
It is a notional loss in revenue to the extent the international price of the fuel is higher. It may or may not be a loss-making proposition to produce the fuel when there is an under-recovery.
In case of kerosene, oil companies suffer an under-recovery as well as a loss because the local retail price is much lower than the cost of crude oil. But sale of a product like petrol can still be very profitable at times, even if oil companies are reporting under-recovery of a few rupees a litre.
Does a rise in underrecovery make an oil co's operation less profitable?
It may not. At times, international crude oil prices remain flat but petrol and diesel prices rise. In such a situation, an Indian refinery's profitability will not change because crude oil costs have not gone up. But under-recovery would have risen because the cost of importing the fuel would have risen.
Has the concept of underrecovery exaggerated the problems of oil firms?
The reduced the supply of refined oil products and the change in the demand supply situation made petrol and diesel more costly. Under-recovery on diesel looks higher this year. In other words, oil companies want a higher price for diesel partly because some refineries in other countries were shut down. Apart from this, oil companies also charge a customs duty and a marketing margin, in addition to marketing cost, to calculate underrecovery. These are profits, not costs.
Is under-recovery the same as loss?
It is a notional loss in revenue to the extent the international price of the fuel is higher. It may or may not be a loss-making proposition to produce the fuel when there is an under-recovery.
In case of kerosene, oil companies suffer an under-recovery as well as a loss because the local retail price is much lower than the cost of crude oil. But sale of a product like petrol can still be very profitable at times, even if oil companies are reporting under-recovery of a few rupees a litre.
Does a rise in underrecovery make an oil co's operation less profitable?
It may not. At times, international crude oil prices remain flat but petrol and diesel prices rise. In such a situation, an Indian refinery's profitability will not change because crude oil costs have not gone up. But under-recovery would have risen because the cost of importing the fuel would have risen.
Has the concept of underrecovery exaggerated the problems of oil firms?
The reduced the supply of refined oil products and the change in the demand supply situation made petrol and diesel more costly. Under-recovery on diesel looks higher this year. In other words, oil companies want a higher price for diesel partly because some refineries in other countries were shut down. Apart from this, oil companies also charge a customs duty and a marketing margin, in addition to marketing cost, to calculate underrecovery. These are profits, not costs.
Implications:
ReplyDeleteFiscal deficit, diesel consumption patterns, long term imflation, improper accounting of government finances
Way Out:
Deregulation of diesel, control short term inflation by cut on state sales tax, customs duties on import
Details:
Under recoveries incurred funded by government through explicit subsidies, contribution by upstream companies and some transferred to end users(price hikes)
Petroleum companies report profits because of under recoveries paid for by upstream companies and govt subsidies, but for deregulated items like petrol and due to pricing controls, it still incurs losses on those accounts
Deregulation will mean cleaner accounts, as the under recovery mechanism hides real costs of the problem
Any product price advantages due to declining international prices offset by a depreciating rupee going down by 8%(prices have gone down by 40% since 2008 internationally)
Oil subsidies comprise 32% of govt subsidy outgo, share 50-60% burden in underrecoveries, budgetary provisions of 2012-13 of 48,000cr grossly underestimated, most already used in 2 months for previous year arrears!, increase in fiscal deficit, share of oil in FD is at 16% alarming, leads to upward pressure on interest rates, limit ability to raise funds for critical social and critical infra projects
Diesel almost 4% of WPI, deregulation will lead to higher inflation immediately , but lower longer term inflation, reduce wasteful consumption
Hidden deficits borrowings under PSUs and SPVs - have same deleterious effect of crowding out private investment but not juxtaposed to actual FD accounts in annual statement