The Oil Bonds Conundrum

Updated: Dec 19, 2021

OVERVIEW

Petroleum has a very interesting story when its use as a source of fuel comes into light. Petroleum is a yellowish black liquid found beneath the Earth’s surface, formed when large quantities of dead organisms are buried under intense heat and pressure. Since many decades, petroleum has widely been used as a source of fuel to run motor vehicles, ships, aeroplanes. This industry is a multi-billion dollar industry and such countries exist in the world that would have known no existence had this amazing compound not existed.

Numerous companies exist that deal with the conversion, extraction, transportation and other related processes of petroleum. One such prominent business in India is that of petroleum/oil marketing companies. Oil marketing companies undertake the distribution, transfer and sale of petroleum or petroleum products for

wholesale or retail purposes. These companies include Indian Oil Corporation Ltd (IOCL), Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) etc. The reach of petrol throughout the country is made possible due to the widespread chain of network of these companies. Oil marketing companies purchase oil from the international markets or domestic suppliers. After purchase, they undertake the refining and processing of petroleum. After the completion of this process, oil is supplied throughout the country as per the needs. It must be noted that all oil marketing companies don’t undertake the refining process in India. It is only the big companies that have the capacity to do so. These are the companies around whom the entire oil bonds controversy lies, about which we’ll talk later in this article.


HISTORY


We all know that more than 80% of the petro products sold in India are manufactured by importing oil from oil exporting countries. India imports oil from various countries under OPEC- Oil and Petroleum Exporting Countries and the United States of America. The base price along with excise duty (which is approximately 90% of base price and dealer’s commission) and VAT (varies from state to state, goes up to another 90-100% of base price and commission) imposed by central and state governments respectively, and processing costs makes the actual costs of these products very high. This makes a businessman unable to fuel their daily needs and as a result would affect the national economy drastically. In order to overcome this problem, the government came up with an idea to help petro companies in India by fixing the oil prices by itself for the public.


However this step was not the solution to the problem. Price fixation process lead to oil marketing companies’ reduced profits due to low recovery from sale. The government had to provide something for this step taken by them.


INTRODUCTION


Oil Bonds refer to an instrument issued by the government to compensate oil marketing companies for the losses that they suffer because of selling oil to the public at lower prices. These bonds are issued in the form of loans by oil marketing companies and shouldn’t be confused with other debt instruments.

Due to price fixation and the oil marketing companies’ reduced profits, the government decided to support these companies as they play a very essential role when it comes to tax collection.The government was not in a position to offer cash discounts to oil marketing companies at the time of issue and therefore issued these bonds. Since these were government issued bonds, they held high value as the principal and interest repayment was a certain event, unlike the case when these would have been issued by private players. Thus due to high credibility, these bonds had great value and were also eligible to be sold in the open market. Since these were to be redeemed in a timespan of more than 15 years, most companies grabbed the opportunity to sell these off and liquidate their assets.

These bonds are in talks these days, since the current finance minister Shrimati Nirmala Sitharaman has blamed the previous governments for issuing these bonds which has led to skyrocketing prices of diesel and petrol. Let us analyse this.


SHOULD OIL BONDS BE BLAMED FOR HIGH FUEL PRICES?


We have seen that the prices of petrol and diesel are at an all time high. In many cities, the prices have crossed the Rs 100/litre mark for petrol and Rs 90/litre for diesel. Most of the oil bonds were issued during the period between 2005-2010 when oil marketing companies had lost their right to fix prices of petrol and diesel. These bonds were issued for a period of 15-20 years and it’s time to redeem these bonds in the upcoming fiscal years. The government has been paying interest on these bonds as it becomes due. The

union government is of the opinion that since they have to redeem these bonds now, it ‘’needs’’ to charge higher prices to pay off the debt. However, here are some figures that would show us the actual picture. As per an article of The Indian Express dated 24th august 2021, “The interest on oil bonds paid in the last seven years totalled Rs 70,195.72 crore. Of the Rs 1.34 lakh crore worth of oil bonds, only Rs 3,500 crore principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment between this fiscal and 2025-26”. The government has to repay Rs 10,000 crore in the current fiscal year, another Rs 31,150 crore in 2023-24, Rs 52,860 crore in 2024-25, and Rs 36,913 crore in 2025-26. In totality this is far less than what the government collects from excise duties on petroleum products alone. For instance, in 2020-21 it collected Rs 3.71 lakh crore as central excise revenues from petroleum products, nearly three times of what it has to pay. With this we can also conclude that the reason for massive oil prices is not the international oil prices or the processing costs, but the heavy taxes imposed by the state and central governments.


THE ROAD AHEAD


The government deregulated the pricing of petrol in 2010 and diesel in 2014. This allowed oil marketing companies to determine the price of these products, and revise them every fortnight. However, from June 16, 2017, prices for petrol and diesel are announced at 6am in the morning on a daily basis, keeping in mind the daily crude price fluctuations and thereon applicable taxes. Hence the companies decide the fuel prices and are later announced. It is expected that fuel prices will continue to remain high for the next few months. Hence, one should try to minimise motor vehicle usage in order to cut down on their costs and use more public transport as it would be a cheaper mode of travelling.


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