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A K Bhattacharya: Slipping up on oil reforms

It's time the petroleum ministry faced the challenges of oil pricing reforms, instead of hiding behind the oil firms

A K Bhattacharya  |  New Delhi 

A quick estimate suggests that international crude oil prices for Indian refineries (or what oil industry experts refer to as the Indian crude oil basket) have gone up 22 per cent since the government decontrolled petrol prices in June 2010. Retail petrol prices in the same period have risen only 13 per cent. In the normal course, these simple numbers should shock anyone who believes that oil companies are not in the business of charity. Why should oil marketing companies carry the burden of these losses by selling a product below cost?

Take a closer look and you will find the situation even more shocking. Prices of diesel, kerosene and liquefied petroleum gas (LPG), which account for more than 60 per cent of the total sales of Indian oil marketing companies, remain under government control. Thus, the oil-marketing companies continue to incur a loss or under-recovery of Rs 7.65 for every litre of diesel they sell today. The under-recovery, or the difference between the sale price and their refining and marketing costs, is higher at Rs 19.6 a litre for kerosene and Rs 366.28 for every 14.2 kg cylinder of LPG. The total under-recovery on this count would be over Rs 73,000 crore this year. Who will bear this burden?

Now, consider the government’s approach to this basic problem. When he presented the Union Budget for 2010-11 last February, Finance Minister Pranab Mukherjee valiantly announced that he was not providing for any financial allocations to make good the oil companies’ under-recovery for the current fiscal year. This raised the hope that the government would take some bold measures during the year to unshackle the oil industry as recommended by the Kirit Parikh Committee and indeed by many such committees in the past. Those who doubted the government’s courage to move ahead with such reforms had to revise their stance in June 2010, when the government raised petroleum product prices and gave the oil companies the freedom to fix petrol prices. What made the prospects rosy was the government indication that the oil marketing companies would soon enjoy similar pricing freedom for other petroleum products and diesel in particular.

However, the script, thereafter, changed quite dramatically, with international oil prices inching up slowly but surely, and domestic inflation continuing to cause concern for policy makers. Worse, rising prices and the scourge of corruption galvanised the opposition political parties into a potent force that virtually derailed all the government’s plans on rolling out the next phase of oil pricing reforms. Today, there is a big debate even on the modality of compensating the oil marketing companies for their under-recoveries. While the upstream oil companies, namely ONGC and Oil India, would bear one-third of the burden, the government had not yet given its full commitment on taking care of one-third of the under-recovery since this might strain its finances.

Mind you, oil companies are also worried since the rising international crude oil prices have already increased their total under-recoveries. There are also other associated impacts on the government. ONGC’s burden for sharing the under-recovery will go up and this might adversely affect the valuation of the shares that it plans to issue in the next couple of months under the government’s disinvestment programme. The government is putting up a brave face by claiming that its disinvestment programmes would remain unaffected since no oil-marketing company was on the disinvestment list this financial year. However, that argument should not hold much water for two reasons. One, there are no immediate signs of the government giving oil marketing companies the freedom to fix prices of diesel, LPG and kerosene. Two, without pricing freedom, the disinvestment programme for these oil marketing companies in the coming fiscal year will be doomed to failure.

The Union finance ministry may well consider a cut in taxes and duties on petroleum products to soften the impact of their price rise on the inflation index. That measure, however, will only be a palliative. Worse, it would once again turn the popular mood against oil pricing reforms and the agitating opposition political parties will stand vindicated. It is time the petroleum and natural gas ministry faced the challenges of oil pricing reforms, instead of hiding behind the oil companies. Instead of appearing defensive, the ministry should come out in support of the pricing decisions the oil marketing companies took in the last few months.

Yes, prices will go up if international crude oil prices keep rising. Not allowing the oil companies to recover their refining costs and make reasonable profit is not a sensible long-term policy. Instead, the government should look at other macro-economic measures to manage inflationary expectations. It is also time to put an end to the distorted pricing policy, in which the price of petrol, accounting for only 10 per cent of the oil industry’s sales, is free, while the price of diesel, accounting for 40 per cent of the industry’s sales, remains under government control. By allowing the oil companies to face criticism for the recent petrol price increases and remaining quiet itself, the petroleum and natural gas ministry is inflicting the biggest damage to the prospects of oil pricing reforms.

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First Published: Tue, January 18 2011. 00:14 IST