The Hindu Business Line : Petroleum product prices

The real message from high crude prices is that India should increase energy efficiency and reduce the rate of growth of consumption of petroleum products to the extent possible. Rather than subsidies, the Government must emphasise increasing investment on improving efficiency and discovering adequate energy sources, says S. VENKITARAMANAN.

A call for action in the direction of energy, efficiency and alternative sources is the need of the hour.

Inflation having crossed 8 per cent, the common man is worried about the impact of the latest rise in the petroleum product prices, especially of petrol, diesel and LPG. The Government has had a problem convincing its Left partners about the logic of passing through the rise in international crude prices.

The crisis arose because the oil marketing companies faced a liquidity problem as a result of their being compelled to sell the products below cost. Virtually, they had no money to buy crude to process into petrol, diesel and LPG. This led to supply bottlenecks, with many pumps reporting “no stock”.

This would have led to further problems had the Government dithered further on price increase. The situation developed into a crisis mainly because the Government had not recognised that there was no longer in force an Administered Price Mechanism.

The expert opinion of Dr C. Rangarajan, Chairman of a Special Committee on Petroleum Products Pricing in 2006, had clearly been that the Government should move to what he called “import-cum-export parity” (a weighted average of import parity price and export parity price in the ratio of 80:20), which would reflect the costs of imported crude as well as domestic crude, besides export price.

The question of the fisc bearing the excess was raised by the Left coalition partners. The Finance Minister argued that there is a limit to subsidising petrol and diesel. Whatever the argument, finally the solution resulted in a mix of actions, oil marketing companies bearing part of the burden. We are, however, faced by higher petroleum products prices in the country as a whole.

Various political parties have launched a blame game. The argument that the price rise was due to international factors does not seem to appeal to them. There had been an interesting debate in the Press on whether the NDA was able to perform better than the UPA in the matter of price rise of petroleum products.

UPA vs NDA

When the NDA was in power, the international price of crude was substantially lower, ranging from $12.5 to $36.25 per barrel, against the current $137+ confronted by UPA. However, the NDA regime dismantled the administered price mechanism. It passed through the international prices to the ultimate consumer.

It has been pointed out that during the NDA regime, kerosene prices were raised from Rs 2.52 to Rs 9.01 in a span of just four years, whereas the UPA has increased the price by only Re 0.8. Whether this in itself is an economically desirable policy is a different matter. But the UPA scores politically.

The NDA had also raised the LPG price by Rs 109 per cylinder in a span of five years. In its four-year regime, the UPA has increased it by Rs 33.15 in June 2006 and again by Rs 50 recently, bringing out to a total increase of Rs 83.15. No economic terrorism here!

While all these statistical arguments are the legitimate province of political advocacy, the fact remains that there can be no escape from passing on the increase in petroleum products prices, which reflect the cost of the essential raw material — crude.

So long as OPEC maintains its stranglehold on high prices of crude, the Government cannot escape from the price rise in petroleum products. Otherwise, the economy will come to a standstill because the oil marketing companies will find it difficult to maintain the supply chain.

There has been much argument on whether it makes sense for the Government to levy high taxes on petroleum products and crude and then subsidise the final price. There has to be some way in which the Government has to raise revenue and petroleum products, being articles of mass consumption, they offer a suitable object for levying taxes. If the Government cannot levy taxes on petroleum products, how is it to find resources for various schemes, which are part of the National Common Minimum Programme?

Taxes

An argument has been advanced that some resources can be raised better or more effectively by raising income and corporate taxes. This runs counter to the sensible objective of encouraging economic activity, including investment, thereby leading to infrastructure and other growth.

There has also been a suggestion that the Government should adopt a policy of taxing so-called windfall gains of exploration companies. This runs counter to the declared objective of encouraging investment in exploration so that we can become self-reliant in energy.

To introduce a windfall tax at this stage of development, when we are inviting domestic and foreign companies to enter into exploration and production, amounts to killing the goose that lays the golden eggs.

It has been suggested that the burden of oil marketing companies should be shared by upstream majors, like ONGC. This again means that companies engaged in exploration will be at a disadvantage compared to the promised freedom to levy internationally competitive charges for the products. This is a self-defeating proposition as it will dissuade further exploration and production of gas and oil.

Oil bonds

Another question is whether the device of Oil Bonds can be a successful solution to the problem. Oil Bonds issued to the oil marketing companies are effectively a way of Government’s promising to pay in future for the present commitment of subsidies. But, the Bonds will have to be “liquefied” if the oil marketing companies have to raise enough resources. This has been attempted by the suggested device of making Oil Bonds rank as SLR securities.

In effect, this only means the Government is borrowing from the market through the oil marketing companies. The total borrowing of the Government in the market is restricted by the availability of liquidity in the system. So long as liquidity is good, as at present, the RBI may not mind overall the Government conferring SLR status on Oil Bonds.

But this raises a fundamental question: whether it is at all advisable for the Government to issue Oil Bonds instead of allowing oil marketing companies to charge the market prices.

No escape from conservation

Ultimately, the whole matter boils down the question of India increasing energy efficiency and reducing the rate of growth of consumption of petroleum products to the extent possible. The Government has to emphasise not the policy of subsidy, but a policy of increasing investment on improvement of efficiency and discovering adequate energy sources.

This is perhaps the real message that high crude oil prices are sending to the rest of the world. The world as a whole is coming to the limits of growth with the resources that are available.

It is, therefore, necessary that India starts a programme of energy conservation and simultaneously the development of alternative energy sources, perhaps emphasising solar and hydro-electric, besides nuclear sources.

The emphasis on nuclear power could not have come at a more crucial time than now. A call for action in the direction of energy, efficiency and alternative sources is perhaps more appropriate to the situation than a Prime Ministerial exhortation to reduce foreign trips by Ministers and other expenditure.

While these are important objectives, they do not seem to be as significant as the pursuit of goal of energy efficiency and alternative energy sources.

One hopes the Prime Minister, in his next appeal to the nation, renews the focus on these aspects of the problem. That would be more befitting his role as the economic visionary and reformer nonpareil!

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