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Feb 28, 2012, 06.02 PM IST | Source: Moneycontrol.com

10-15% hike in regulated fuel prices inevitable: CRISIL

CRISIL Research has come out with its report on fuel price hike. According to the research firm, the upward pressure on crude oil prices will compel the government to increase the retail selling prices of regulated fuels.

CRISIL Research has come out with its report on fuel price hike. According to the research firm, the upward pressure on crude oil prices will compel the government to increase the retail selling prices of regulated fuels. The government will share at least 50 per cent of the under-recoveries, which will exert further pressure on its finances.

India’s oil under-recoveries to still remain above Rs. 1 trillion

CRISIL Research, India’s largest independent integrated research house, expects an upward pressure on crude oil prices due to the ongoing geo-political tensions in Iran. As a result, average crude oil prices will remain firm in the range of $110-120 per barrel during 2012, higher than the earlier estimates of $100 per barrel, despite a weak global economy. This will compel the government to hike the retail selling prices of regulated fuels at least by 10-15 per cent in 2012-13 in order to rein in the mounting under-recoveries.

In a bid to counter Iran’s plans to acquire nuclear weapon building capabilities, the European Union (EU) has decided to place an embargo on the import of Iranian oil. In retaliation, Iran, which accounts for about 4 per cent of global crude oil production, has threatened to cut oil exports to the European countries and also close down the Strait of Hormuz. This gateway handles 35-40 per cent of the global oil trade, including supplies from Iran, Saudi Arabia and Kuwait. “A supply disruption due to closure of the Strait could result in a sharp spike in oil prices. During the earlier incidences of conflicts in the Middle-East such as the Iran-Iraq war, the Iraq-Kuwait war of 1990-91, and the Iraq war of 2003, every one per cent disruption in supplies led to a 9-15 per cent increase in oil prices”, says Sridhar Chandrasekhar, Head – CRISIL Research.

However, the likelihood of the closure of the Strait leading to a sharp spike in oil prices appears low. “The world economy can ill-afford very high oil prices as it continues to remain fragile due to the uncertainty in the Euro region despite a mild recovery in the US”, adds Dharmakirti Joshi, Chief Economist, CRISIL. Moreover, the closure of the Strait would also have adverse implications for Iran’s own economy, as oil exports account for one-fifth of the country’s gross domestic product and two-thirds of the government’s revenues. The tensions in the Middle-East have already caused oil prices to go up by 10-15 per cent in the last 3-4 weeks.

While the geopolitical risks in the Middle-East will continue to exert upward pressure on oil prices, weak global demand will cap the upside. Consequently, barring a conflict in the Middle-East, CRISIL Research expects average oil prices in 2012 to be in the range of $110-120 per barrel, higher than the earlier estimates of $100 per barrel.

The upward pressure on crude oil prices will compel the government to increase the retail selling prices of regulated fuels. The government had increased the retail prices by 10-15 per cent in June 2011. A similar increase in prices is expected in 2012-13 as well. Despite this increase, the under-recoveries will cross Rs. 1 trillion in 2012-13 for the second consecutive year, following the Rs 1.4 trillion estimated for 2011-12. According to CRISIL Research, the government will share at least 50 per cent of the under-recoveries, which will exert further pressure on its finances.

Disclaimer: CRISIL has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources which it considers
reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors in transmission or for the results obtained from the use of such information / Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/users/ transmitters/ distributors of this Report.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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