Centre's dilemma on liberalising oil marketing

It got worse when it was later followed by violent uprisings in Libya since Feb 15. The possibility of such uprisings in other oil rich Arab countries like the UAE, Kuwait, Saudi Arabia, though unlikely, has  provided Wall Street oil speculators enough justification in driving crude oil prices to $120 per barrel.

The Indian economy has not been able to digest even $80 per barrel crude oil prevailing before the Arab revolts. While the government has given approval to public sector oil marketing companies to increase petrol prices, it has forced these ‘navaratna’ oil companies to lose money while selling diesel, PDS kerosene and residential LPG. In recent days, as crude oil prices exceeded $110 per barrel, under-recoveries of oil companies have gone from bad to worse. With impending elections in four states, the government will face the dilemma of absorbing these losses or increasing petro product prices.

Had the government dismantled the administrative pricing mechanism (APM) in true spirit, and allowed the market to determine petro product prices by implementing the recommendations of three high-level committees, it would have been relatively easy for it to deal with this difficult situation today. Unfortunately, when the crude oil prices were low in early 2009, the government missed the golden opportunity to liberalise the oil sector.

The ‘navaratna’ oil companies will lose Rs 5 per litre on petrol, Rs 13 per litre on diesel, Rs 26 per litre on kerosene and Rs 440 per cylinder on LPG if oil prices remain around $110 per barrel and the government does not allow them to increase the price. Since the public sector oil company refineries are not sophisticated enough to handle lower priced crude oil to produce higher valued products, their refining profit is marginal to negative.

Forcing oil companies to sell petro products below the cost results in an annual subsidy burden of Rs 1,40,000 crore to the government. It is true that the government can reduce these huge under-recoveries or losses of the oil companies either by reducing customs duty on oil imports and excise taxes or forcing ONGC and Oil India to sell crude oil at reduced prices.

They can also ask the state government to reduce their sales taxes. When gasoline price is Rs 62 per litre, the tax component is Rs 27 per litre (Rs 12.4 is state sales tax) and in the case of diesel, out of Rs 43 per litre, Rs 13 (Rs 8 per litre is state sales tax) is tax. Which state will be happy to reduce the sales taxes? If the Centre reduces excise taxes, then the under-recoveries of the oil companies will come down. But the Centre’s deficit will increase. Such deficit financing is bound to give rise to even higher inflation which affects the poor the most. Or the government can reduce its investment in education or health or other welfare measures which will also hurt the poor.

Free lunch

The rich and the middle class cannot continue to have free lunch the way they have had in recent years when crude oil prices touched $147 per barrel. India imports 75 per cent of its crude requirements. When international prices go up, the import cost to pay for the crude oil will go up. The Indian economy has to bear this burden one way or the other. But we as a nation are not prepared to debate this.

Countries like India face another problem. The US marker crude oil West Texas Intermediate (WTI ) is $15 to $20 per barrel below the European marker crude oil Brent. In the past, WTI used to be $1.50 per barrel above Brent. Indian crude imports are based on Brent crude oil. As a result India will end up paying $15 per barrel to $20 per barrel more than the US crude oil market. On an annual basis this is a burden of about $20 billion to India if this anomaly continues.

India’s poor for the most part are outside the formal economy. They are hardly affected directly or indirectly by the gyrations of international crude oil prices. It is the the rich and the middle class, accustomed to enjoy free lunch, who protest any petro product price increase. Surprisingly, the entire political class also protests against any increase in petro product prices in the name of helping the poor. The Kirit Committee report of 2010 had clearly showed that increase in petrol prices do not give rise to inflation and any increase in inflation caused by diesel price increases are not significant. It also argued that market-based LPG prices will not be any burden even to the middle class. Still it is an enigma that the government is afraid to liberalise oil marketing and allow the market to determine the prices.

Even after liberalisation, the government can continue to help the poor by giving kerosene and residential LPG. To reduce the diversion of subsidised products the government can use either high-tech smart card or low-tech coupon system. The latter strategy was successfully implemented earlier in Mysore district and was later dropped under political pressure. Implementation of Aadhar should facilitate the adaption of the smart card system. But the government cannot continue to dilly-dally with petroleum product prices which has already affected India’s energy security and governance. The recent brutal murder of additional collector, Yashawant Sonawane by kerosene mafia is a stark reminder of this.