it is the gap between the local price of fuel and what would have been the price if the fuel were imported.
Is under-recovery the same as loss?
It is a notional loss in revenue to the extent the international price of the fuel is higher. It may or may not be a loss-making proposition to produce the fuel when there is an under-recovery.
Is under-recovery the same as loss?
It is a notional loss in revenue to the extent the international price of the fuel is higher. It may or may not be a loss-making proposition to produce the fuel when there is an under-recovery.
I
n case of kerosene, oil companies suffer an under-recovery as well as a loss because the local retail price is much lower than the cost of crude oil. But sale of a product like petrol can still be very profitable at times, even if oil companies are reporting under-recovery of a few rupees a litre.
n case of kerosene, oil companies suffer an under-recovery as well as a loss because the local retail price is much lower than the cost of crude oil. But sale of a product like petrol can still be very profitable at times, even if oil companies are reporting under-recovery of a few rupees a litre.Does a rise in underrecovery make an oil co's operation less profitable?
It may not. At times, international crude oil prices remain flat but petrol and diesel prices rise. In such a situation, an Indian refinery's profitability will not change because crude oil costs have not gone up. But under-recovery would have risen because the cost of importing the fuel would have risen.
Has the concept of underrecovery exaggerated the problems of oil firms?
This year it did. Prices of oil products in Asia rose earlier this year, when a fire shut down a large refinery in Taiwan. This reduced the supply of refined oil products and the change in the demandsupply situation made petrol and diesel more costly.
The Tsunami in Japan and a recent fire at a refinery in Singapore had the same impact. The refining margin for diesel, called "crack spread" has been $20 a barrel most of this year. In April, diesel margins jumped to a three-year high of $24 per barrel. Last year, it was $10-15.
So, under-recovery on diesel looks higher this year. In other words, oil companies want a higher price for diesel partly because some refineries in other countries were shut down. Apart from this, oil companies also charge a customs duty and a marketing margin, in addition to marketing cost, to calculate underrecovery. These are profits, not costs.
Can oil companies be at a disadvantage by linking prices to under-recovery?
Yes. This may happen next year. In 2010, very little new refining capacity was added in Asia, while demand was strong. Next year, China and the Middle East will add about 1 million barrels per day of refining capacity. This is expected to increase supply of products and deflate refining margins. As a result under-recovery is expected to fall.
It may not. At times, international crude oil prices remain flat but petrol and diesel prices rise. In such a situation, an Indian refinery's profitability will not change because crude oil costs have not gone up. But under-recovery would have risen because the cost of importing the fuel would have risen.
Has the concept of underrecovery exaggerated the problems of oil firms?
This year it did. Prices of oil products in Asia rose earlier this year, when a fire shut down a large refinery in Taiwan. This reduced the supply of refined oil products and the change in the demandsupply situation made petrol and diesel more costly.
The Tsunami in Japan and a recent fire at a refinery in Singapore had the same impact. The refining margin for diesel, called "crack spread" has been $20 a barrel most of this year. In April, diesel margins jumped to a three-year high of $24 per barrel. Last year, it was $10-15.
So, under-recovery on diesel looks higher this year. In other words, oil companies want a higher price for diesel partly because some refineries in other countries were shut down. Apart from this, oil companies also charge a customs duty and a marketing margin, in addition to marketing cost, to calculate underrecovery. These are profits, not costs.
Can oil companies be at a disadvantage by linking prices to under-recovery?
Yes. This may happen next year. In 2010, very little new refining capacity was added in Asia, while demand was strong. Next year, China and the Middle East will add about 1 million barrels per day of refining capacity. This is expected to increase supply of products and deflate refining margins. As a result under-recovery is expected to fall.
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