The Hindu Business Line : Oil on fire

OIL COMPANIES MAY finally have something to cheer about, with the Government deciding to revise upwards the retail prices of petrol, diesel and cooking gas. It may have been an overdue decision — the last revision was in August after which global oil prices shot past the $55 mark — but when it did come the Government has almost fully addressed the complaints of the industry. Import parity prices for petrol and nearly that for diesel are good decisions, but the surprise was the inclusion of cooking gas where a regular, monthly price increase has been decided. The increase of Rs 20 per cylinder now and Rs 5 every succeeding month may not be large enough given the subsidy of Rs 158 per cylinder now being borne by the oil companies, but it certainly is a good beginning. As for diesel, the Government had to keep an eye on the inflation demon, which raises its ugly head with any increase in the price of this fuel. Though not fully on import parity, the increase in excess of Rs 2 per litre should go some way in helping the oil companies tide over the present difficulties.

With the near-term concerns addressed, it is now time to focus on the long-term policies for the oil sector. It is an irony that despite the so-called free-pricing regime in vogue now, the oil companies have to get the Government's nod every time there is a need to revise prices upwards. It is impossible to marry the commercial interests of the oil companies with the political and social obligations of the government which means that so long as the latter retains control it is not going to be real freedom for the oil companies. What this conflicting interests can do was clearly in evidence in the second quarter performance of the three oil majors — Indian Oil, Hindustan Petroleum and Bharat Petroleum — each of whose earnings fell by over 30 per cent.

It is perhaps time the policy-makers realised that the era of cheap oil is over. Global oil prices may have retreated to sub-$50 levels, but the long-term trend will be more towards $40 a barrel, far from the $25 levels till some time ago. The suggested causes range from the racing demand of the emerging economies such as India and China to the fact that global oil production, especially at wells outside West Asia, is running well-nigh close to capacity. Given this reality, the Government should frame an integrated energy policy for the long term that promotes usage of other fuels such as natural gas even as it allows market forces to operate freely in petroleum product pricing. Economic usage of the latter cannot be promoted unless the market is exposed to free pricing. Controlled, artificially low prices only induce misuse and wastage. The latest move to grant import parity price for petrol is a step in the right direction. But it remains to be seen whether the Government will stand by that resolve if global oil prices surge again.