Keep petro prices low
by Ashwini Mahajan on 10 Mar 2011 1 Comment

THE hike in petrol prices by oil companies has hit the common man hard. The masses, reeling under hyper-inflation, are feeling helpless. The consumption of petroleum products cannot be compared with that of any other commodity as increase in fuel prices raises the cost of transport, both freight and passenger, the running cost of industries, and the overall energy bill. Clearly, any rise in prices of raw materials for industry will result in an increase in the prices of goods and services produced by the same.


Petro companies have for the time being spared diesel and LPG prices, but this relief is temporary. It implies that sooner or later freight and passenger fares will also increase. The rise in the cost of living because of higher expenditure on transport and the cost of operating industries may aggravate the inflationary pressures.

The increase in fuel prices is not a new phenomenon. What is new is that previously petro prices were administered by the government; since June 2010 the price level is determined by the companies. This calibration is called ‘determined prices’. These companies effected a 5.6 per cent hike in the price of petrol in December 2010. Within a month, they announced an increase by another 5 per cent, resulting in an effective increase of nearly Rs 6/litre in just one month. The price of diesel has not been changed, but these companies have signalled that the cost of diesel and LPG will also go up in due course of time.


Prior to June 2010, the government used to administer petroleum prices which would be revised once or twice every year. The hike was never so frequent and so substantial in a particular year. There were instances when petroleum prices were even reduced with the fall in crude prices in the international market. More important, the Central government never provided a huge government subsidy in its endeavour to keep petro-prices under check.

Petroleum companies were told to issue oil bonds to compensate their losses in the event of high crude prices internationally. Everybody knows that oil prices do not remain static in the international market. Last year, oil prices rallied between $64 and $90. If we take the past two years into account, the highest price of crude in the international market was recorded at $147; it touched a low price of $34.57. This means that by selling at a loss at a time when international crude prices are higher and compensating the loss by issuing oil bonds, does not mean loss in the long run. The oil companies could redeem these bonds as and when they had a surplus when international crude prices plummeted.


On the whole these companies were earning a profit, though their profits were not very huge under the administered price regime. But they were also not a liability on the public exchequer.


In an attempt to justify its earlier decision to allow companies to fix petro-prices, the government claims that because of state control and the effort to keep the price of diesel, petrol and LPG under check, petroleum companies were incurring huge losses and the government was not in a position to compensate them. In the government’s reckoning, these companies may still incur losses because they will charge lower prices for diesel and kerosene. The government claims that as crude oil prices continue to rise and consumption of petro-products is ever so high, the losses of these petro-companies may rise further. The only way, therefore, to save these companies from losses is to allow them to determine the cost plus prices.


But these arguments do not hold much water. These companies have been making huge profits in the past. In 2008-09, ONGC earned a net profit of Rs 16,041 crore, GAIL Rs 2814 crore and Indian Oil Rs 2570 crore. This was incidentally the year in which the highest-ever crude prices were recorded in the international market. There is little logic in the government’s argument that the new arrangement has been put in place to save petro companies from huge losses.


On the contrary, because of the increasing demand of these petro products, the government has always gained significantly by way of taxes [excise duty, VAT and so on]. These companies also provide dividend to the government from their profits in proportion to the Centre’s shareholding. According to provisional estimates of the Ministry of Petroleum and Natural Gas, the contribution of the oil sector to the Central and state exchequer has been a booming Rs 183,861 crore in 2009-10. Therefore, the government ought not to be reluctant if it has to occasionally compensate for the losses of petro-companies.


The government’s argument that it was providing a huge subsidy to keep petro-prices low is not correct. During 2009-10, when high crude prices were recorded, the Central government’s subsidy was only Rs 14954 crore, whereas a provision of only Rs 3108 crore has been kept for 2010-11. This subsidy is mainly for kerosene, diesel and LPG. The government has promised to continue the subsidy on these commodities. Therefore, the burden on the exchequer will persist.

If we examine the loans raised by oil companies by way of bonds, we can ascertain that the total value of the loans raised by them was only Rs 10306 crore, as per the revised estimates for 2009-10. Therefore, the story of a burden on the exchequer to the tune of Rs 70,000 due to low administered prices seems exaggerated.

The policy of administered prices is not causing any major problem for the oil companies or the government. As regards the public sector oil companies, they can obviously be expected to forego a part of their profits to ensure the ‘public good’, namely, keeping petro-prices low.


The government can also be expected to shell out a part of its revenue from this source to compensate occasional losses suffered by the oil companies. Yes, private petro companies are definitely benefiting from the new policy. It is imperative for the government to reflect on its petro-price policy and re-introduce the earlier system of administered prices to save the common man from a fresh spurt of inflation.

The writer is Associate Professor, PGDAV College, University of Delhi, Delhi 
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