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Commentary

Oil at $145 and Indian Oil Companies In Danger

Oil refineries are fighting a political battle now – of not being allowed to export their products and having to support a “managed” price of petrol and diesel to offset the losses to public oil marketing companies.

With Oil at record highs one might think companies like RIL, ONGC which own refineries are in great shape. Unfortunately with the political scenario unwinding, it does not seem so. The Samajwadi party, which is expected to replace the left in the ruling coalition, has demanded that oil refinery outputs be banned from exports and that a “windfall” tax be applied on their profits.

The windfall tax is so stupid I find it difficult to even talk about it. We have to have a free economy and the ability to make unlimited profits without people questioning the quantity. Jeez, who cares what quantity of profits one makes – the more the better, that’s the way this country will grow! Instead you should tax the software sector because they don’t bloody get taxed at all. For oil companies in SEZs I support full taxation, but no “excess” taxation.

And why is the export ban stupid? India has one of the few refineries outside the US that can process the heavy sour crude produced by the middle east. To ban petrol and diesel exports is to simply create a higher demand for light sweet crude outside India, because of the drop in supply of the processed fuels worldwide. This results in a higher crude price, and we largely import crude, so uhm where is the benefit again?

Second: These companies aren’t around for charity. If you push them to the wall they will scale down or shut operations to counter regulation. As simple as that. Now you don’t get any fuel cheaper either, and crude prices still go up and lots more people lose jobs and the SP feels like an absolute dolt. Amar Singh should be made to campaign from Jamnagar.

Third: We’ll lose a lot of the export revenue. I don’t have the figures but I think oil refinery output exports are bigger than the whole software sector. Are we ok losing that much dollar inflow, when there is a net dollar outflow from FIIs and the RBI is holding on to their sacred dollars for dear life? Something has got to give.

But these are rational arguments. Politics is rarely rational. And things are going to get much worse as elections come on.

  • Siddharth says:

    >Or may be another political gimmick to garner funds for party for the elections coming by squeezing the corporates!!

  • Kannan says:

    >Deepak,
    Amarsingh group is supporting windfall tax and against exports;just to create some nuisance to Mukesh Ambani.No other reasons.

  • Roshan says:

    >Hi deepak
    I recently watched Obama`s sppech on TV…he too was talking abt “windfall tax” on American oil companies….hmm…

  • Mayur Rustagi says:

    >In a country where more than 50% of population lives under $2 it doesnt hurt to tax the companies a little. As for the loss they are currently incurring right now, government is using this as a buffer, when oil prices will drop the prices in India can be kept up for some time to make money.

    I also disagree with the

    “Jeez, who cares what quantity of profits one makes – the more the better, that’s the way this country will grow!”

    As you know india may have a lot of poverty however our power hungry politicians have maintained our Gini coefficient below both China and USA by this policy

  • Deepak Shenoy says:

    >Roshan: It’s stupid in America also. Reasons are different there, but suffice it to say this is a political measure.

    Mayur: I disagree completely. The way to remove poverty is not to tax people – that only takes away from the efficient and puts money in the hands of greedy politicians who will just eat it all up. Better for the oil cos to expand using hte profits so that eventually people earn more than $2 a day. The concept of forced distribution of wealth is so commie and so stupid I don’t know where to begin.

    We have to promote more profits – there cannot be a limit to it. It’s like restricting cement profits – again a stupid thing to do. I would rather that supply and demand play themselves out and we find ways to restrict demand instead of taxing supply.

    If such policies stay our companies will simply go abroad. And then we’ll have people living on $1 a day. I am sorry to be this aggressive but that’s how strongly I feel about it.

  • Mayur Rustagi says:

    >I agree we cant have policies that stop profits in the long run .. I also disagreed with
    cutting of cement profits and blocking of its export.
    (“betray thy neighbour” ring a bell)
    It should have been done automatically by allowing the rupee to appreciate . But the case of Oil is different especially in this case when its the speculators that are floating the price and not an actual price rise.
    Supply and demand do play each other out but thats in the long run. In the short run you need much more finer control over them especially when you are taking about lives of of 300 million people living under $1.

  • Siddharth says:

    >Mayur,
    Are you saying the oil Co’s are responsible for speculating the POO in the market?

  • Mayur Rustagi says:

    >Somebody has to pay for the speculation. If the Oil companies pay, They can make their profit by keeping the price up in Indian market(which government will allow). They will definately get hit.

    However if common man pays then more than 300 million people life comes at stake. So if you take the odds, i would let the oil companies take some damage in the short run.

  • Deepak Shenoy says:

    >mayur: how will the common man benefit if oil companeis pay? the oil prices aren’t coming down because of a windfall tax. the taxes aren’t going to the common man – believing that would be naive, as politicians will steal it or give it to the non-deserving.

    Common man is going to pay for this either ways, mate.

  • Siddharth says:

    >No offense intended but I feel communist tone in Mayur’s statement, tax(rip) the rich corp and give to poor!

    Well raising the taxes just shows how inefficient/unhealthy the govt accounts are. Well UK has tax on everything, even inheritance tax is there, in some sense one can say socialist welfare state. Tax on death its just sick.

    Wish if politician’s had bigger picture of the future of country and strong foresight to steer the country.
    Today windfall tax, what tomorrow? Will this end anywhere anytime?
    Even if govt collects windfall tax how that will help common man? Deepak has already made a point on this.
    This is like being dictatorship rules, in my opinion, or otherwise may be just a political agenda to appease the public that they are doing something to help them!
    At the end of the day if govt charges higher taxes from companies, I dont believe the co’s will take the heat and let the profits flip? Its the common man who will ahve to pay for those added charges. Kindda hidden TAX.