India News and Features Alliance (INFA) - FREE PRICING OF PETROLEUM PRODUCTS, by Dr. Vinod Mehta, 28 May 2008

The price of crude oil has crossed US $125 a barrel in the international market as against US $100 a barrel a few weeks ago. But, the Government is fighting shy of revising the retail prices of petroleum products in line with the rise. How long will this go on? How long will the public sector oil companies be made to suffer? One of the private sector companies, which had opened retail petrol pumps has been forced to close down. Unlike the public sector, private firms don’t get subsidy.

Recal, a few years ago a policy decision was taken to free the pricing of petroleum products. But so far no Government in power has had the courage to implement it. The opposition parties or even parties within the coalition are coming in the way of allowing the market to determine the price of petrol and petroleum products.

Normally, when the price of crude in the international market rises, the domestic prices of petroleum products too should increase and vice versa. But our polity will not allow the Government to raise prices, thus forcing the public sector oil companies to incur losses. Similarly, when the international price of crude falls the Government does not reduce the price of petroleum products on grounds that the oil PSUs had incurred losses during price hike. Doesn’t it look like the pricing of petroleum products has become of a football game between the Government and political parties.

It is common knowledge that the prices of products rise for various reasons – supply is short, increase in production costs, producers join hands to restrict supplies and so on. Even if the prices of such products are controlled by the State, after some time it could also raise these for it cannot go on subsidizing for ever. The prices of items of mass consumption like milk, edible oil etc. have been rising over the years, without not much dissatisfaction from either the public or the political parties’ front.

However, the problem of petroleum products’ pricing has remained a major issue for the past many years. When in 1996, the rupee depreciated by 11 per cent, the barrel of crude started costing more. The then United Front government which raised the prices of petroleum products received a hostile reaction from the public; Congress, BJP and CPI also criticized the price hike. Today, nobody bothers to ask the question as to who will pay for the increased international price of crude, if the domestic price is not to be increased. Every government will need to face this question if the price of oil is not left to the market forces.

True, an increase in the prices of petroleum products will definitely fan the fires of inflation, but who will pay for the losses incurred by the domestic oil companies? We must understand that we import 70 per cent of our crude needs. About half of our import bill is taken up by crude. But, in a situation when we need funds for investment in infrastructure and other areas can we afford to subsidize the petroleum products when we import the crude at international prices. The simple answer is no.

In the prevailing atmosphere it may not be politically feasible to completely free the pricing of petroleum products, but we must move now to free the pricing of petroleum products and also move to cut the consumption of oil in the immediate future.

For long, the government-controlled Oil Coordination Committee has been fixing prices for petrol, diesel, jet fuel, kerosene and liquefied petroleum gas (LPG). But there has been a feeling for long that prices of petroleum products be freed and brought in line with more or less the international prices. Presently, petrol and diesel are overpriced, because of taxes, while kerosene and cooking gas under-priced.

In March 2004, the then Finance Minister had announced freeing the oil sector from price controls but that has remained on paper only. Because of the continuously rising prices of crude in the international market the Government has not been able to muster enough courage to free the prices of petroleum products. Perhaps, at the moment it is right as the price of crude is very high and freeing price controls would not only invite protests from consumers but also fan the fire of inflation.

However, the Government must take a policy decision on freeing the petroleum products from price controls and then free them at an appropriate moment – the moment the prices of crude have stabilized at a reasonable level and are likely to stay at that level for a few months. If the government feels that kerosene and cooking gas need to be subsidized then it should come out with a separate proposal on how it is going to do it. Since we are dependent on crude imports for 70 per cent of our requirements we cannot provide the needed subsidies on an enormous scale. Free the prices of petroleum products and let them find their own level. Since the oil business is in the public sector there would be no danger of companies indulging in profiteering.

After freeing the petroleum products from price controls we should move towards curbing consumption and finding reliable cheaper sources of getting crude and gas. Getting oil exploration rights outside India by public sector Indian oil companies is one such step. The attempts by the government to get Iranian and Central Asia gas by way of pipeline through Pakistan/undersea pipeline or gas from Myanmar and Bangladesh are steps in the direction but nothing concrete has happened till date.

Apart from freeing the petroleum products from price controls and augmenting the supply of petroleum products, it is necessary to curb the consumption of petroleum products, especially petrol and diesel. Since we are heavily dependent upon import of oil to meet our energy needs, it may be advisable to switch over to other sources of energy wherever possible. We have coal and river water in abundance, which can be used to produce electricity. The city public transport system may switch over to that mode which uses electricity-- metro-rail, trolley bus, tram run on electricity which are also safe and clean. As the use of this public transport system increases, the consumption of petrol and diesel will go down. Similarly, the transportation of large number of goods to long distances should be through railways and not through trucks. This will help reduce the consumption of diesel. The Government and the public bodies must come together to make efforts to reduce the consumption of oil.

The time, however, has come to free the pricing of petroleum products. Let it rise when the international price of crude is rising. Let it fall when the international price starts falling. It will have a salutary effect on the economy as a whole.--INFA