Dealing with a sacred cow

Oil Sector Reforms


When developed countries are concerned with looming energy crisis, India seems be playing the proverbial Nero’s fiddle. Soon after getting back his old portfolio of petroleum ministry, Murli Deora had expressed his goal to deregulate petrol and diesel prices. This is neither radical nor new.

In 2002 itself, administered pricing mechanism controlling oil prices was dismantled. Thus oil companies were given freedom to fix prices in line with the international oil prices.

However this lasted only for a short time. As crude prices started to increase in 2003, petroleum ministry started to control the prices charged by the public sector oil marketing companies.

The current petrol and diesel prices mandated by the petroleum ministry gave handsome profits to OMCs, the last six months with crude oil averaging $46 per barrel. In recent months with crude oil prices hovering around $70 per barrel, OMCs are again losing money.

The stock market, public sector oil companies and most of the media have welcomed the proposed change in pricing policy as though it is a panacea. But this does not comply even partially with the recommendations of integrated energy policy report of the Planning Commission nor with the recommendations of umpteen expert committees to reform the oil sector.

Since the petroleum ministry will start interfering with the pricing decision when crude oil prices go above $75 per barrel, no responsible private oil company will make plans to invest in downstream. There is no good justification or rationale for taking over the control of fixing prices when oil prices go above $75/b.  Oil companies like Reliance, and Shell have experienced huge losses in marketing from 2007 to the third quarter of 2008.

They will be shy to invest since it is a widely held view that even in medium terms oil prices will not remain at current low level.

It is understandable that any government would like to control the inflation when the price of a critical commodity like oil increases because of international market. Since central and state government taxes account for more than 50 per cent in the case of petrol and 30 per cent in the case of diesel, the government can reduce the impact of high crude oil prices (when it goes above $75/b) rather than interfering with the market. 

There is a new era in energy sector in general and oil sector in particular with gigantic uncertainties. These are: the possibility of world oil production peaking in the next few years, impact of global warming on account of green house gases, role of renewables in meeting energy needs, impact of convergence of food, fuel and water, renaissance of nuclear energy, etc. The petroleum ministry instead of adopting integrated approach to solve the basic problems facing the country is taking only baby steps like tinkering with petrol and diesel prices.

Given the political reality of the entire political class –the communist on the left to the BJP on the right -- opposing any reform in oil sector, even these baby steps may not get implemented. Last year the petroleum ministry had to drop the “kerosene colouring marker” system under pressure despite its success in detecting the petrol stations adulterating the petrol with PDS kerosene. Few years back, Karnataka government had to drop a similarly successful ‘coupon’ system to distribute PDS kerosene.

Anti-oil reform lobby has remained strong because the petroleum ministry and NGOs have failed to convince the public as well as the political class on how the present system of subsidies, and price controls have failed to help the poor.

Though every one knows about the rampant corruption in oil sector, the petroleum ministry has not taken the trouble to quantify the losses to the government and also to educate the public. Wrong pricing structure in energy sector has also prevented the needed development of renewable energy sources.

PDS kerosene

Misuse and diversion of PDS kerosene and residential LPG are resulting in the generation of at least Rs 45,000 crore of black money per year. This is the mother of corruption in India. Diversion of PDS kerosene can be reduced by introducing smart card system as recommended by the Planning Commission. Diversion of LPG can be prevented by streamlining the pricing in residential, commercial and auto sectors.

When a commodity which is short in supply is sold at different prices as in the case of LPG, it is but natural that the subsidised residential LPG is diverted to markets fetching higher revenues. Is there any compelling reason to give subsidies to the rich and middle class who can afford to pay the market price?

While it is laudable that the UPA government is planning to liberalise the petrol and diesel prices shortly, it could have used the short honeymoon period after winning a resounding victory to initiate some radical reforms in the oil sector.

Let us hope that Murli Deora will not only succeed in implementing these baby steps, but also in initiating the equally needed reforms to reduce rampant corruption in oil sector. In the name of energy security and helping the poor, oil sector has become the modern sacred cow. It is time we start dismantling the subsidy raj and really help the poor through the high tech smart card system.

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