The Hindu : Opinion / News Analysis : Oil pricing scheme review necessary

Online edition of India's National Newspaper
Monday, Oct 11, 2004

Opinion

Opinion - News Analysis

Oil pricing scheme review necessary

By Sushma Ramchandran

NEW DELHI, OCT. 10. Oil prices and inflationary pressures have become a key concern of the Government with the price of crude oil reaching $53 a barrel in world markets last week.

The Government is struggling to keep oil prices down to contain inflation and protect consumers, but is worried over the impact on oil companies, which may suffer a loss in profitability this year.

Price policy

With the interests of consumers high on its agenda, the Government may well have to adopt the policy of the previous one and give the go-by to deregulation in the oil sector and virtually revert to the earlier system of administered pricing.

On the other hand, it can review the entire scheme of oil pricing, including the heavy burden of duties, and work out a mechanism by which consumers are protected from the volatility of the world markets, while oil companies can be relatively independent on pricing issues.

The Finance and Petroleum Ministries made an effort in this direction in July when a price band formula was evolved to take care of minor fluctuations in the world markets. The scheme, however, did not find favour with the oil companies. The net result is that prices of petrol and diesel not being raised, as it would increase the inflationary pressures.

Inflation is already hovering between seven and eight per cent and to compound matters, elections are under way in Maharashtra.

Earlier this year, the previous National Democratic Alliance Government followed a similar approach of keeping the prices down prior to the general elections. This artificial containment forced the United Progressive Alliance Government to raise the prices of petroleum products. But it evolved the price band formula for marginal price movements.

Review duty structure

The external oil scenario remains grim with prices continuing to harden but the Petroleum and Finance Ministries can still find ways to cushion consumers from its impact to some extent.

This is possible by a review of the import duty structure on crude oil and petroleum products such as petrol and diesel as well a study of the actual realisations from these levies in the current fiscal.

The Ministries normally make an assessment of the revenue from the oil sector, based on world prices, which were estimated to range around $29 a barrel for this financial year.

Since prices have shot up to around $40 a barrel for the Indian basket of crudes, the actual revenue receipts from crude oil and products would be substantially higher than the original projections.

It should thus be possible to reduce the duties for the rest of the year without making a significant dent in the resource mobilisation efforts.

One round of such cuts was effected in August but it should be possible to reduce duties even further, given the huge rise in world prices.

An effort is also being made by the Petroleum Ministry to persuade State Government to cut the hefty State sales taxes on oil products, but this is not likely to yield results in the short run.

Margins eroded

Besides, oil companies that have to sell products such as petrol, diesel, LPG and kerosene at prices below international levels have to bear a large burden but are being compensated. As the Indian Oil Corporation (IOC) has recently conceded, it is making as much as $8 a barrel on refining margins — the profit generated by processing crude into various petroleum products. Undoubtedly, the surplus generated by such high margins has been eroded by having to market products at existing prices.

Even so, this cushion should help to ensure that consumers are not burdened with a sharp hike in petrol or diesel prices. LPG and kerosene continue to be sold at subsidised rates though cooking gas is largely used in urban areas and it is a moot point whether kerosene actually reaches target consumers.

The key product among these remains diesel, which accounts for 50 per cent of the total oil products consumption.

Any hike in diesel prices immediately has an impact on prices as it is used for bulk transport and also affects farmers using diesel-generating sets in the sowing season.

Keeping the price line in such oil products is imperative if inflation is to be kept under check.

All possible options thus need to be examined, especially revision of import duties, before taking any decision on raising oil prices.

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