Foolhardiness: Government Tries to Pull the Wool over the Eyes of People

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The problem with high retail prices is due to the fact that the government treats petrol and diesel as cash cows to make money. The retail price of petrol carries a tax component of more than half the price of the crude oil and this does not come down when the crude prices fall. The levies are marginally lower in the case of diesel. As long as retail petroleum products are used to raise resources to run the government, the consumers cannot expect the real benefit of any price declines in the international market. Here’s an analysis, for Different Truths.

Apparently, it has taken nothing less than a BJP rout in the latest round of by-elections for the petroleum ministry to realise that the petrol and diesel price situation in the country was untenable. On the day the results were announced Oil minister Dharmendra Pradhan is reported to have called a midnight meeting of senior officials and top executives of oil companies to figure out how to reduce fuel prices. One does not know whether the timing was prompted by a discovery during the day about the high prices or he was really hard-pressed for a more respectable time.

Pradhan had cut a sorry figure, appearing on television channels to justify the farce of the 1-paisa price cut, arrived at after extensive calculations of all the relevant issues, including international crude prices, the burden on oil marketing companies due to the sacrifices they make in various ways, such as giving up a certain amount in the price of regulated products. With humiliation written all over his appearance, he explained for the benefit of his countrymen how petrol and diesel prices were not based on crude prices alone and had a lot to do with the exchange value of rupee as well.

This was preceded by the most farcical discovery of a mistake in the calculations of the oil marketing companies, beginning with the announcement of a 60 paise cut per litre. Within a couple of hours, however, came the amendment that the price reduction was by a solid 1 paisa. The companies seemed to be least bothered about the ecological disaster it could cause by way of higher demand as a consumer had to buy 100 litres to make one rupee!

When it comes to maths and calculations, it is an accepted norm that if one calculation is wrong, all other calculations are also suspect. And this is particularly true of oil companies, which have attained a certain notoriety for their wrong calculations, especially when computing the losses they suffer from what is fondly referred to as ‘under-recovery’. It is most unlikely that they would have revised the decision if the wrong calculation had been in their favour. How can one be sure that their calculations had not gone wrong on the previous occasions? There is absolutely no transparency in whatever they do.

Curiously, the one-paisa cut came when the international benchmark crude prices had fallen 2 percent for the week after reaching several years’ high. Now let’s come back to Pradhan’s claim of complications brought in by the exchange value of rupee. When crude oil reached its historical peak of $132.5 in 2008, the exchange value of the rupee was around 40 to the dollar. That made an effective crude price of Rs 5,300 per barrel. According to the current rate of crude and the prevailing exchange value of rupee, the price would be around 4,550 rupees per barrel. How will Pradhan explain the series of price increases for petrol and diesel recently when the peak crude price for the past one year was only $80? The prices have since been reduced by 6 paise and so on, but such cuts are only an eye wash meant to hoodwink the public. If it is dynamic pricing, the cost has to reflect even minor fluctuations. But what we have is regulated dynamism.

Oil marketing companies are crying foul that an increase of every dollar in the price of the Indian basket of crude oil raises their under-recovery by around Rs. 4,500 crore, estimated on the basis of the refinery gate price as of 2013. Similarly, they claim that every one-rupee depreciation in the rupee-dollar exchange rate causes an under-recovery of around Rs. 8,000 crore. But they are not talking about what happens when the crude price falls by 1 dollar or the rupee makes a gain of 100 paise against the dollar.

The fact of the matter is petrol and diesel prices are what they are today not because of the high price of imported crude. Having entered into term contracts, the prices could even work out cheaper than those quoted on a daily basis. The problem with high retail prices is due to the fact that the government treats petrol and diesel as cash cows to make money. The retail price of petrol, for instance, carries a tax component of more than half the price of the crude oil and this does not come down when the crude prices fall. The levies are marginally lower in the case of diesel. As long as retail petroleum products are used to raise resources to run the government, the consumers cannot expect the real benefit of any price declines in the international market.

Under-recovery is a catch that helps the oil companies to force consumers to pay for their inefficiencies and backwardness. It provides protection to the companies to offset issues related to their old and less sophisticated refineries, excess manpower, and location of the refineries on the basis of political considerations rather than economic criteria. Even if they deserve protection, it should be on a transparent basis rather than being subsumed through higher prices using the pricing mechanism.

K Raveendran

©IPA Service 

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