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Monday, Oct 04, 2004

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Opinion - Editorials

THE CONTINUING OIL SHOCK

THE CENTRAL GOVERNMENT has asked the oil marketing companies not to increase the retail prices of petroleum products. While benefiting consumers, the decision obliges the companies to bear the burden of the relentless price surge in international oil prices. On Wednesday last, crude was quoting above $50 a barrel. India is a major importer of oil and under the petroleum pricing mechanism now in force, the burden of an increase in international prices can be borne by any or all the three key players — the Government, the public sector oil companies, and consumers. The United Progressive Alliance Government, which had to contend with rising crude oil prices from the start, initially designed a price band that gave oil companies some leeway in fixing retail prices while providing a cushion to consumers. However, in the face of an unprecedented rise in oil prices, the price band became irrelevant. Petroleum prices are now being reviewed on a fortnightly basis. Retail prices of petrol and diesel were raised on two occasions, on June 15 and July 31, but the increases were moderated by the Government opting to bear a part of the burden through reducing excise duties on the two products. This time the Government would like the oil companies to make the sacrifice as the apprehension is that any increase in retail prices would hurt the economy. There is also the political factor of the Maharashtra Assembly elections being barely less than two weeks away.

One is less sure whether domestic consumers will continue to get a measure of protection since global oil prices show no signs of relenting in the near future. While disallowing the public sector oil companies' request for a mark-up in retail prices, the Government has formed a Committee to suggest ways of moderating future price increases by examining the indirect tax structure. Both the Centre and the States collect substantial sums from customs, excise and sales taxes on petroleum products. In August the Central Government reduced indirect taxes and gave up about Rs.2,500 crores but that has not been enough in the face of the global price increase. There is a strong case for revamping the indirect tax structure on petroleum products. A tinkering with duties will clearly not do for the long term. The existing ad valorem structure has a cascading effect on retail prices. A change to a specific duty structure, essentially a method followed earlier, will be unacceptable from the point of view of government review. Some intermediate solutions such as an ad valorem tax that will be frozen once crude prices rise above a specified level can be considered. There will be reduced revenue collections but since at the time of this year's budget no one foresaw global oil prices in the $50 range it will be more a question of the exchequer giving up windfall gains.

Petroleum companies will benefit if the several aberrations across their value chain are corrected, and consumers will find prices edging down if the sector becomes more competitive. For now, however, the odds are stacked in favour of global oil prices remaining high. Lower inventories in the United States caused by recent hurricanes will mean renewed demands on the oil markets. Nigeria's oil-producing Niger delta is plagued by serious law and order problems. While OPEC says it will step up supplies, only Saudi Arabia, Iraq and Venezuela have the potential to produce more. Even assuming they will succeed, the extra supplies will be insufficient to bridge the gap between global demand and supply in the foreseeable future. The recent oil price upsurge has attracted hedge funds, commodity funds, and plain speculators. All this cannot be good news for India. Predicting oil prices is truly a mug's game.

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