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Opinion
The Curious Case of India's Oil Policy
by Sushma Ramachandran
India's petroleum policies are getting curious. The latest report on the oil
sector by former petroleum secretary B.K. Chaturvedi has proposed a phased
raise in oil product prices so that eventually, domestic retail prices are
brought on a par with international levels. This is surely an Alice in
Wonderland proposal.
In the past, even a small increase in prices of kerosene, diesel and
gasoline has taken months to implement, with numerous inter-ministerial
meetings, followed by talks with the prime minister and finally ending with
an approval by the cabinet.
The reason is simple. Oil prices are a political hot potato. Every
politician knows that even a small hike in prices could prove suicidal for
poll prospects. In such a scenario, for an official panel to blithely
recommend a monthly rise in oil prices appears to be somewhat unrealistic,
to say the least.
Besides, the panel must surely know that this is an election year and
inflation is already raging at much above the 12-percent mark.
The chances of the United Progressive Alliance (UPA) government accepting
any suggestion to impose further hike in fuel prices on the common man
appears fairly remote.
Petroleum Minister Murli Deora has thus taken no time at all to reject
outright the report's recommendations. Apart from the political angle, it
also does not make much economic sense to talk of passing through
international levels of oil prices to the domestic market right now as this
would definitely create further inflationary pressures.
In the long run, of course, it is a desirable aim that domestic prices of
oil products are not subsidized and there is a linkage to world oil prices.
At the same time, given the volatility of the international oil market, a
system has to be put in place that would provide stability to consumers
instead of exposing them to rapidly changing fuel prices.
It would definitely be a more fruitful exercise for the government to ponder
over the need for a long-term policy that would provide a modicum of
stability for consumers while ensuring that subsidies are transparent and
built into the system.
Some interesting proposals on the subsidy issue have already been made by
the C. Rangarajan panel, which had suggested that smart cards be issued to
those below the poverty line so that they can avail themselves of kerosene
at subsidized rates.
This would replace the existing system of providing kerosene at subsidized
rates through the public distribution system, where inefficiencies and the
corruption it has generated are legendary.
Even representatives of Left parties who have fought fiercely to protect the
supply of subsidized kerosene to weaker sections concede there is tremendous
leakage and adulteration in the existing mechanism.
While evolving such a policy, it would be useful to look at the existing oil
pricing system in a realistic context.
First, despite the talk of huge under-recoveries - retailing fuel products
at below cost - the same entities are making higher revenues by what are
known as refinery margins.
This represents the amount oil companies make by processing crude into
several different products. The refining margins go up along with the price
of crude. So oil refining and marketing companies are also making some gains
along with the losses on sale of products at prices below production costs.
Second, all oil products are not being sold below international market
levels. Prices of industrial products like LSHS (low sulphur heavy stock)
and bitumen as well as aviation turbine fuel are reviewed every fortnight
and the prices are altered accordingly.
And finally, the country does not import all its crude requirements.
About 25-30 percent is still being produced within the country. The national
oil producing companies like Oil and Natural Gas Corp (ONGC) and Oil India
Ltd are paid international prices for this crude, which explains their
soaring profits.
This does not mean to say that the domestic oil companies are not facing a
crisis. It simply means that there are many facets to oil pricing and all
this needs to be studied in depth, preferably by industry experts rather
than by bureaucrats, before reaching any final conclusions.
The Chaturvedi Committee has certainly examined most of the key issues but
oil companies are opposing proposals like the one on export parity pricing,
as it would reduce refining margins.
In the past, the then petroleum minister Mani Shankar Aiyar had formulated a
band system of pricing, which envisaged domestic prices going up or down
automatically in case of volatility in international markets.
Unfortunately, the entire plan had to be peremptorily abandoned when world
oil prices far exceeded projections. It really means that it is time for the
government to look at the long run, taking into account the fact that world
oil prices may continue to remain in the region of 80 to 100 dollars per
barrel for quite some time.
The other issue that is not being talked about lately is the need to step up
indigenous exploration efforts. Normally, high oil prices spur exploration
efforts since this makes such high cost projects more viable than ever
before.
Despite the sector's regulator, the Directorate General of Hydrocarbons (DGH),
insisting that the subcontinent is highly prospective as far as petroleum is
concerned, there has been a relatively poor international response to
various oil exploration bidding rounds in India.
In fact, Indian companies like ONGC and Reliance Industries have made the
maximum effort in this area. Even the huge gas discoveries off the
Krishna-Godavari basin in Andhra Pradesh and off the Gujarat coast do not
seem to have lured the oil majors to our shores.
The reasons for this lack of interest need to be examined as well as the
validity of the reports claiming high prospects in our region.
As for the Chaturvedi panel report, it is clearly not acceptable to the
petroleum ministry or the oil companies in its present form.
It could, however, serve as the basis for another committee to look at the
entire oil scenario and present proposals for a long-term energy policy.
Such a policy is urgently needed, given the vagaries of the international
oil market.
It is true that no strategy can cope with world oil prices reaching heights
of $150 dollars per barrel. It is also equally true that a policy is
essential to review the country's overall energy deficit and consider ways
to overcome this shortfall over the next decade.
(Sushma Ramachandran is an economic and corporate analyst. She can be
reached at sushma.ramachandran@gmail.com)
August 24, 2008
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