Pankaj Agarwal | Wednesday May 17, 2017

Don’t crib about petroleum prices, consume them wisely instead

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The other day, I saw an interesting discussion on a TV channel (of course a TRP obsessed one). The topic was unjustified price of petroleum product. The panelists were ready with numbers, analysis and justifications. The Congress spokesperson was trying to outclass the others with a flurry of emphatic and loud arguments about how over the years, crude oil prices had tanked but the aam aadmi did not get any reprieve as retail prices of petroleum products did not fall in line with decline in crude oil prices. He was bragging that how Manmohan Singh, the shrewd economist, was able to keep prices in check despite high crude price.

Looks convincing at first glance; Government of India (NDA govt.) is really plundering people with exorbitant and unjustified price of petroleum product when crude price is almost at the all-time lowest level (considering time valve for money).

But this statement is completely devoid of reality and how things function in this sector.

Till the 1990s, the oil sector was completely controlled by the Indian government.  Public Sector companies were the only marketer and the government was controlling pricing of product. However, effect of economic liberalization, which took off in 1991 was bound to have its effect on this sector. Policies were formed and private players started coming in and process of price decontrol started as well.

With the onset of the current millennium (2003-04), private oil companies started marketing of petroleum products and, barring products like LPG and Kerosene, pricing of all other products was decided by market. The government only controlled products like LPG and kerosene through Public Sector Undertakings.

However trouble started when crude price started soaring steeply during the middle of the past decade (prices touched 130-140 USD/barrel mark in 2008-09). At that point in time, had the government allowed the market continue to decide rate of petrol and diesel in sync with rising crude prices, the whole economy and the life of common citizen would have been made more difficult and thus government again started controlling prices of petrol/diesel through Public Sector companies. Private players could not take the brunt as they were in no position to sell product at price at par with PSU’s price and hence they took a back seat.

Due to price cap by government, PSU suffered huge losses (under-recoveries) which was partially compensated by government and upstream oil companies (ONGC), but it was not at all adequate to cover the losses. Downstream oil companies started reeling.

Here let’s look at few figures before we move forward. In 2016, India consumed 180 MMT (million metric tonne) of crude oil against a production of a meagre 41 MMT. Thus 78% of the requirement was imported. Therefore it is clear that in case of rising crude price, the inflated crude cost will go out of Indian economy for 75-80% of the crude consumed. Demand is increasing multiple times than the production. 10 years back in 2006, consumption was just 121 MMT against the production of 35 MMT. As clear over past one decade consumption has grown by a CAGR of 4.5% whereas CAGR for production has been just 1.9%. Since economy is thriving and so major new oil discovery on cards, this trend would definitely continue for the time being.

Selling products at forced lower prices was like postponing problems, which certainly is not the solution.  Now when crude prices started plummeting again in 2014, it was a huge blessing for country like India where petroleum is a scarce resource. Once crude price are down to a reasonable level, the government(NDA govt.) gave PSUs free hand to fix price of diesel & petrol. Once prices were again in line with crude price, it became a level playing field for PSU oil companies and private companies. So now we see fueling stations of private companies like Essar and Reliance selling petrol/diesel.

In fact when prices nose dived after NDA came to power, the government took this opportunity to raise taxes to mint some extra money out of it. Nothing wrong with it per se. It was the government alone who had taken the burden of under recoveries, when crude price was high. Moreover the government is under pressure to maintain the fiscal deficit within limits.

Thus taking petroleum product pricing as bench mark when crude was hovering high is grossly misappropriate, rather it is bizarre. That pricing was highly below par.

Critics put up a simple mathematics. Crude price three years back was double of what it is today then we should be paying half price for petrol and diesel today. But for sure it must be clear by now that it is just not possible.

GOI and PSU is still sharing burden of under recoveries on kerosene and LPG and therefore it is only fair that at least all other products should be sold at par pricing.

Let’s pay a fair price for products you are buying. As responsible citizen our endeavour should be to make sure that we become little miser when it comes to consumption of petroleum product. Cribbing on prices is useless and completely misleading.