(EnergyAsia, May 29, Thursday) — India could soon face a nationwide fuel supply squeeze as cash-strapped oil retailers are planning to reduce sales to limit losses in the country’s price-controlled market.

Under orders from the government not to raise retail prices, the country’s main downstream companies IOC, HPCL and BPCL are threatening to reduce supplies of gasoline, diesel, kerosene and liquefied petroleum gas (LPG) to the domestic market.

The government has forced the oil companies to subsidise domestic consumers by refusing their numerous requests to raise retail prices despite the sharp rise in oil prices on the world markets over the last several years.

In a recent meeting, the companies delivered their sternest warning yet to the government that they may have to shut down refining production to stem the losses. They have begun strike action by refusing to deliver LPG to households.

Fearing a public backlash, the government has downplayed the threat by stating that the refiners are still considering their options. It has also denied that the companies have refused to supply LPG to new households.

With crude oil surging to a new record high of more than US$135 a barrel, the oil companies said they would soon run out of cash to pay for imports. They complained that they have been losing millions of dollars each day buying crude at international prices, and selling refined products at a loss.

The government is considering their requests for fuel price hikes and cuts on crude oil import duties.

Sensing the urgency, Petroleum Minister Murli Deora is believed to have told Prime Minister Manmohan Singh to accede to the industry’s demand. The petroleum ministry has estimated that India’s downstream companies could lose as much as Rs2.25 billion this year if domestic fuel prices are not raised. (US$1=Rs40).

The ministry, which had previously refused to listen to the oil companies,  is proposing to raise gasoline price by Rs10 a litre, diesel by Rs5 and LPG by Rs50 per cylinder.