The government may free petrol and diesel prices from its control if global oil prices stay at current levels of under $45 a barrel till February.

The government had in April 2002 freed petrol and diesel prices from administrative control, following which the state retailers revised prices every fortnight in line with changes in costs.

But, controls were brought back in 2004 when crude oil rose to $37 a barrel and they have stayed high since then with crude oil soaring to an all-time high of $147 a barrel in July 2008.

Prices have cooled down since then averaging around $43-44 a barrel this month. "If this trend sustains for 2-3 months, petrol and diesel prices are likely to be freed from administrative controls," a highly placed official said.

He said the cut in petrol price by Rs five a litre and diesel by Rs two per litre announced earlier this month was only an interim measure as the government was keen to watch how international oil prices behave in short-to-medium term.

"It was an interim measure to complete freeing of auto fuel prices," the official said pointing that not all of the margins on petrol and diesel being earned because of fall in crude prices had been passed on to the consumers.

Even after slashing the prices, oil firms continue to make Rs 9.89 a litre profit on petrol and Rs 1.03 per litre on diesel.

However, a new mechanism of compensating state-run firms for losses on domestic LPG and kerosene is needed before freeing auto fuel prices.

IOC, BPCL [Get Quote] and HPCL [Get Quote] are projected to lose Rs 1,14,500 crore (Rs 1,145 billion) this fiscal on fuel sales, of which only Rs 30,000 crore (Rs 300 billion) can come from ONGC [Get Quote], GAIL and OIL.

The rest would have to be in form of oil bonds, the official said.

Also, on cards is a cut in excise duty on petrol and diesel but being a new compensation mechanism this would be decided when a full-time Finance Minister takes over.

The official said the government had in June decided that upstream companies-- Oil and Natural Gas Corporation, Oil India Ltd and Gail India [Get Quote] -- would have to bear Rs 45,000 crore (Rs 450 billion) of the projected Rs 2,45,000 crore (Rs 2,450 billion) revenue loss on sale of petrol, diesel, domestic LPG and kerosene at that time.

The revenue loss has come down to Rs 1,14,500 crore with the fall in international oil prices and so has the revenues of ONGC who would now have to sell crude oil it produces at one-third price envisaged in June.

Also, refiners Indian Oil [Get Quote], Bharat Petroleum and Hindustan Petroleum were to bear about Rs 20,000 crore (Rs 200 billion) of the revenue loss in June but the three firms together posted a net loss of Rs 14,000 crore (Rs 140 billion) in first half of the current fiscal and their refining margins turned negative with a fall in oil prices.

"So, they would not be able to bear any subsidy," the official said.

"Freeing of auto fuel prices in the current scenario would result in further lowering of petrol and diesel prices but their are losses on domestic LPG and kerosene which have to be addressed before such a move can be resorted," he said.

Currently, the government dictates retail selling price of petrol, diesel, domestic LPG and kerosene sold through public distribution system.

While auto fuel pricing may be freed, administrative control over the remaining two would continue, the official added.