by Jerome a Paris
Mon May 26th, 2008 at 07:41:39 AM EST
Sinopec says crude tax rebate barely covers loss
Top Asian oil refiner Sinopec Corp is still reeling from refining losses despite a government tax incentive, its chairman said on Monday, as global crude prices have charged above $130 a barrel.
(...) Chen Ge, Sinopec's board secretary, said earlier on Monday that the company was losing 3,000 yuan for each tonne of gasoline and diesel that it produces, as it's squeezed between record crude costs and frozen domestic fuel prices last changed 7 months ago.
Oil firms are weeks away from bankruptcy
A fuel shortage looms ahead of the nation as the oil companies rapidly head towards bankruptcy.
With international crude oil prices hovering around $129 a barrel, the country's three oil marketing companies – IndianOil, Bharat Petroleum, and Hindustan Petroleum – are collectively looking at losses of Rs 200,000 crore this year. These losses belong to the budget, but finance minister P Chidambaram doesn't want his own copybook ruined. If these numbers were added to this year's Union budget, Chidambaram's fiscal deficit – the borrowings needed to finance government expenditure – would bloat from a fictitious 2.5% of gross domestic product (GDP) to more than twice that figure.
(...) By early July, they will simply have no cash to run their business and some of them will find it difficult to pay staff salaries. "It is like a time bomb ticking away. If the prices of petro-products are not increased immediately, they will just sink without a trace," top industry sources said.
What is worse, global suppliers of crude and petro-products are not going to honour contracts unless money is paid upfront, which means the country could be looking at a frightening scenario of a fuel shortage.
Governments are caught between a rock and a hard place. Reducing subsidies will cause massive economic pain to the population, and possible revolt, whether of the democratic kind or otherwise, but keeping them in place will bankrupt the oil companies or cause the government to print more money, thus fueling inflation indirectly. So far, China and others have plenty of foreign reserves and can afford to use them to actually buy the oil (but given that they compete with the West for that oil, it only means that prices will go up once again), but beyond the domestic inflationary effect, that may not last that long if prices keep on going up while their demand growth has no reason to slow.
This is a runaway train on its way to an unpredictable crash. Oil company bankruptcies would be an ironic trigger to the crisis, but in any case, the solution will be the same: whether we want it or not, we WILL burn less oil in the future.