Oil politics: By freezing fuel prices, govt is undermining its own policy

Crude oil prices have risen to their highest level since late-2014, pushed by a deepening economic crisis in Venezuela and a looming decision on whether the US will reimpose sanctions against Iran. The price of Brent crude oil, which is the international benchmark, breached $75 per barrel on Monday. A measure of the sharp rise is the fact that Brent crude was priced around $27 a barrel as late as January 2015. As a corollary, the price of the Indian basket of imported crude oil, too, has risen sharply. India’s worry over crude oil prices stems from its energy needs being primarily met through imports. Oil imports rose by over 25 per cent in 2017-18 to $109 billion from a year ago. Elevated oil prices could affect India’s trade deficit and consequently, the current account deficit, which was 1.9 per cent of gross domestic product in April-December 2017-18. 

The other worry is its impact on domestic fuel prices, which moved to a new dynamic regime in June last year. Till two weeks ago, state-owned fuel retailers were revising the prices of petrol and diesel on a daily basis in tune with changes in international prices. However, the government seems to be going back on its promise of a transparent and predictable pricing regime by asking public sector oil companies to pause their daily retail price revision even though the average price of the Indian basket of crude oil has risen from $63.76 a barrel in April to $68.88 a barrel in May. For instance, over the last fortnight, prices of petrol and diesel in New Delhi have been static at Rs 74.63 a litre and Rs 65.93 a litre, respectively, exerting pressure on the marketing margins of these companies. The average marketing margin on petrol and diesel has gone down from Rs 3.5 a litre on April 1 to Rs 1.9 a litre on May 1 for the three public sector oil marketing companies. That is a sharp drop of about 45 per cent. 

There are several troubling aspects of this development. The most obvious is the discretionary manner in which the government has stopped a market-linked pricing regime. Regardless of the reason, such an intervention undermines the credibility of its own policy decision. What is worse is that this is not the first time that the government has intervened. In the run-up to the Gujarat Assembly elections as well, it tried to soften the blow of rising oil prices by cutting its own levies. In the current instance, too, the reason for intervention is the forthcoming Assembly elections in Karnataka. Does this mean that every time there is a state election around the corner, the government will violate its own policy? With the general election due in a year’s time, the momentum of such arbitrary decision-making can be expected to increase. That would be a big mistake. When international oil prices went up sharply between 2004 and 2014, the United Progressive Alliance government did not have the political will or the numbers to pass on the price increases to the consumer. The result was simple: India’s oil exploration and refinery upgradation efforts slowed considerably as the companies did not have enough funds. The current regime can do without such knee-jerk response.