Diesel Decontrol/Deregulation – Everything What You Should Know

December 9, 2014

DIESEL DECONTROL or DEREGULATION

In the backdrop of steep decline in global oil price “Diesel Decontrol” has been a buzzword since past few days.After many permutation and combination govt finally decided to loose its regulatory grips from pricing of petroleum products with immediate effect from saturday midnight(18th oct) was the witness of this much awaited decision.However new price for gas will come into effect from Nov-1.Deregulation means OMC(oil marketing companies) will now be able to fix dieselprice according to market movement.

2.REASON-

Speculations hovering around the reasons of sharpfall are lowering in demand of petroleum as compared to supply,sudden rise in production and dollar depriciation.On14th Oct Brent crude(benchmarkof oil pricing or classification of oil) dropped to $85(lowest since 2010).For the 1st time in more than 2yrs it slipped almost 5%.The factors affecting these downward movement of price are explained below.
Since mid-June Libya jumped upto produce 700000bpd(barrel per day).Before which it was producing around 200000bpd.US continued to expand its oil production estimated around 300000bpd since August.Iraq,Russia,Angola and Nigeria also jumped on to the band wagon.But demand didn’t rise up as expected.Despite hike in production the reduced demand by European & Asian consumers (especially chinese) paved the way for falling oilprice.

3.BENEFIT TO INDIA-

Over the last 5yrs dieselprices have increased by almost 50paisa everymonth.Due to reduction in crude-price was linked to market price.(Bcz govt compensates for the loss of OMCs and provides junta oil on subsidy).This permonth hike in diesel eliminated the under-recovery loss & OMCs started making profits.This triggered diesel price to come down by 3.56 per litre.Brent crude for Indian refiners has been fallen by 25% this year to $83per barrel.
i)This will reduce the subsidy burden on govt by 15000cr.So domestic inflation canbe checked.
ii)Trade balance & CAD(current account deficit) remain under control.
iii)Transport cost drops.
iv)Will give RBI to flex its muscles for easing policy stance.However the policy can swing in both ways.IN MY OPINION BECAUSE OF SHARP FALL IN DIESEL PRICE OF ₹3.56 THE PURCHASING POWER OF CUSTOMER INCREASES.WHICHMEANS MORE MONEY IN MARKET IMPLIES RBI ABSORBS EXCESS MONEY BY INCREASING POLICY RATES.MORE POLICY RATES MEANS HIKE IN INTEREST RATE AND HENCE MORE PROFIT FOR BANKS.

4.CONS-

i)The opposite of benefit cannot be overlooked.While some are viewing this pricefall as a boon to customers,some economists say it might hurt Indian exports since FDI & FII inflow drops.So India’s Forex basket will be affected.
ii)Oil dependent countries will feel the oil-shock very heavily after constructing their budgets around previous price expectations.

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Last Updated On: December 10th, 2014

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