New Delhi: India's largest petroleum refiner and oil marketing company, Indian Oil Corporation (IOC) has decided to ration the sale of petrol, diesel and liquefied petroleum gas (LPG) cylinders, saying it can no longer afford to absorb the rising losses arising from under recoveries of petroleum products. Bharat Petroleum Corp. Ltd (BPCL) has already started a somewhat similar rationing exercise, having restricted sales subject to availability. (See: Subsidies driving top oil companies bankrupt)

Currently, IOC loses Rs300 crore each day on account of subsidised sales of 65 per cent of its products, which sell below market prices. Petrol is sold at a loss of Rs16.33, diesel at a loss of Rs23.49, and kerosene at a loss of Rs28.72 per litre. LPG cylinders, which are the mainstay of cooking fuel in India, are sold at a subsidy of Rs305.90 per cylinder. (See: Indian Oil sees red as daily losses mount to Rs320 crore)

IOC chairman Sarthak Behuria said that the oil marketer is facing an acute liquidity crunch, which has left it with no option but to stall the implementation of all new projects. Moreover, he said that rising crude oil prices and no counterbalancing change in the retail prices of fuel, IOC would run out of money by September end, and may even have to convert its capital assets to generate liquidity.

The move is widely expected to generate panic among consumers. (See: PSU oil marketing companies propose fuel rationing, halt to new LPG connections) As a measure of last resort, IOC could look at selling its stake in oil and gas company ONGC and Gas Authority of India Ltd. (GAIL). By then, IOC would have completely used up its borrowing limits, which has risen from Rs28,000 crore to Rs38,000 crore during the last fiscal. IOC continues to borrow at the rate of Rs2,000 crore to fund its working capital.

With the oil marketing companies running out of money, the availability of fuel in the domestic retail market is sure to be impacted. Behuria has said that IOC would not import fuel, specially diesel, to meet domestic demand, and would continue its refining activities, using whatever little money it had to buy crude. IOC controls 40 per cent of the national refining capacity.

He dded that IOC could sustain a domestic diesel demand growth of up to 10-12 per cent. However, he made it clear that the current growth at around 22 per cent was absolutely unsustainable.

What has made matters worse is the reduction of duties on small diesel cars to 12 per cent in the current budget, which has seen an upsurge in the sales of small diesel cars in India, and has fuelled the consumption of diesel to these unsustainable levels.

Speaking at IOC's annual press meet, Behuria said, ''The market will have to feel the pinch for diesel and petrol. There will be pressure in some parts of the country over the next few weeks. We have seen this kind of crisis in the '80s and the '90s. I am not saying there will be a dry-out. However, there would be a panic situation. We will also aggressively sell premium products such as branded petrol and diesel.''

Crude oil prices spiralled since a year ago, having hit previously unimaginable levels at $135.09 a barrel on 26 May. The last revision of petroleum retail prices by the government was in mid-February, when international crude prices were at $100 per barrel - first fuel price hike since June 2006 (See: Petrol, diesel prices raised) Together the three oil marketing companies are slated to post losses in 2008-09 of around Rs180,000 crore.

Behuria said that a number of sectors which earlier used fuel-oil, better known as naptha, have shifted to using diesel on account of the price difference resulting from the heavy subsidisation of the fuel. A lot of this demand comes from the non-transport sector. He said that diesel demand has increased by around 30 per cent, and that of petrol by 20 per cent, which IOC is unable to meet. ''We will not import diesel to meet this demand,'' he clarified.

The petroleum ministry is still mulling a proposed fuel price hike and a cut in customs and excise duties on crude and crude products. The government is looking at looked at removing the 5 per cent import duty on crude oil, and a reduction of the import duty on petrol and diesel to 2.5 per cent from the existing 7.5 per cent. A simultaneous lowering of the excise duty on both products is also being looked at. All these would be accompanied by a proposed price hike in the price of diesel by Rs2 per litre, and that of petrol Rs4 a litre.