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Explained: Why was there a fuel shortage in India this month?

Why have petrol and diesel retail outlets in some states been rationing supply this month? When is the scarcity likely to ease, and under what circumstances?

An employee of a Bharat petroleum fuel station fills petrol in a vehicle in Mumbai on June 11, 2022. (AP Photo/Rajanish kakade)

For much of June, several cities across the country have witnessed petrol pumps rationing supplies or shutting due to non-availability of fuel, leading to concerns about shortages and triggering panic buying among some consumers.

The situation peaked around the middle of the month, and the government intervened by asking pumps to stay open and directing oil marketing companies (OMCs) to ensure the availability of fuel. The Ministry of Petroleum and Natural Gas also assured there was enough fuel in the country.

The situation has eased since then, and the fuel availability situation is likely to start returning to normal next month.

What’s behind the fuel shortage in India?

As global crude prices increased and the value of the rupee fell simultaneously, OMCs such as state-owned IOCL, HPCL, and BPCL, and private companies Rosneft-backed Nayara Energy and Reliance Industries, started to report losses on retail sales.

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As the losses mounted, downstream oil companies tried to reduce supply to petrol pump vendors, which resulted in fuel shortage at pumps in multiple states. In a statement issued on June 15, the government acknowledged the problem — and said that shortages had been noticed in Rajasthan, Madhya Pradesh, and Karnataka.

The government blamed the scarcity of fuel on the surge in demand — the increase being as high as 50% in the first half of June 2022 over the corresponding period last year. It also said that the states that were seeing shortages were those in which large quantities were supplied by retail outlets belonging to private marketing companies, and where the distances from supply locations — terminals and depots — are larger.

The Centre, however, assured that the production of petrol and diesel in the country “is more than sufficient” to take care of any demand surge.

There are about 81,700 retail fuel stations in the country, some 7,200 of which are owned by private companies. Some dealers said the situation at IOCL retail pumps was better than in those owned by other companies — a situation linked primarily to the downstream retail major accessing cheaper crude. Others, however, claimed that the situation at IOCL pumps was as bad as the others.

According to industry sources, on Friday, over 409 petrol pumps were closed due to fuel shortage, which included 225 pumps of HPCL, 132 of IOCL, and 52 of BPCL. To put things in perspective, IOCL has the largest network of petrol pumps in the country at 34,000 plus; the other two OMCs have around 20,000 pumps each.

Why is the problem more acute in areas where larger numbers of retail outlets are owned by private oil marketing companies?

While prices of petrol and diesel are decontrolled — meaning, theoretically, that their rates are decided by the market — there is an invisible hand of the government in the way rates move. The price of petrol in the past three months in Delhi is a case in point — it rose 3.54 per cent in April, fell 8.24 per cent in May on account of the cut in excise duty, and has remained unchanged in June.

Rise in crude prices and the depreciating rupee during the period have led to losses to OMCs. Industry estimates suggest that at current levels, oil companies are losing Rs 25 per litre on diesel and Rs 10 on petrol, when sold through retail outlets. Many private OMCs therefore stopped sales through their retail outlets, leading to shortage.

Some public sector oil companies also reduced supply to dealers to cut their losses by discontinuing the fuel on credit offered to pump owners, thus impacting their fuel lift. However, Indian Oil has continued with the credit system.

Industry players blame the current situation on the freeze in oil prices. “It is due to the repeated intervention of the Petroleum Ministry in the working of OMCs and the freeze on the petroleum price for more than 150 days due to elections that has resulted in under recoveries,” Hemant Sirohi, a member of the Empowering Petroleum Dealers Foundation and the owner of a petrol pump in Meerut, said.

When will the situation ease?

The solution lies in raising retail petrol and diesel prices to ensure oil companies do not lose money, but that may not happen soon. High fuel prices could have a cascading impact on inflation. Oil companies have raised jet fuel prices and rates for bulk purchasers, but that may not offset all their losses.

Industry experts say invoking the Universal Service Obligation (USO) may also not be enough. “Simply invoking USO will not help in availability of the product at retail outlets, since private companies have increased prices at their outlets. It will be interesting to see how BPCL/ HPCL proceed during the weekly holidays, since in the past supplies without advance payments were not released leading to a dry-out situation across states,” a dealer said. The situation may start to ease from next month, as the monsoon reduces fuel requirement for sectors like agriculture.

BPCL shut half the crude processing capacity at 240,000 barrels per day (bpd) at its refinery in Mumbai from June 10 for routine maintenance. This, however, is unlikely to impact fuel availability significantly, as these maintenance runs are planned and any shortages are made up by other refiners.

An email sent to the Petroleum Ministry, and queries sent to IOCL, HPCL, and BPCL did not get a response until press time.

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How much crude is India buying from Russia?

The Petroleum Ministry said last month that “energy purchases from Russia remain minuscule in comparison to India’s total consumption”. While Iraq remained the top supplier to India in May, Russia rose to second place, pushing Saudi Arabia down to third that month.

India has taken advantage of discounted prices offered by Moscow to ramp up crude imports from Russia at a time of surging global energy prices. Russian imports have jumped by over 50 times since April, and now make up 10 per cent of all crude bought overseas, a PTI report said on Thursday, quoting a senior government official. Prior to the Ukraine war, Russian oil was just 0.2 per cent of India’s oil imports.

As much as 40 per cent of the Russian oil has been bought by private Indian refiners Reliance Industries and Nayara Energy.

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First published on: 24-06-2022 at 10:33:30 am
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