Govt must allow oil companies freedom to fix retail prices independently

This way oil retail sector will be subjected to more competition

From May 1, petrol and diesel prices are being revised on a daily basis in five cities — Puducherry and Visakhapatnam in southern India, Udaipur in the west, Jamshedpur in the east and Chandigarh in the north. State-owned fuel retailers, which own more than 95 per cent of the nearly 58,000 petrol pumps in the country – of which 200 fuel stations are in these five cities – plan to extend this scheme to the whole country gradually. On the face of it, this is a welcome move, as domestic fuel prices in such a scheme will be in sync daily with international rates, much as it happens in most developed countries. Before May, public sector fuel retailers revised prices every fortnight. These revisions were based on two factors — the average international price of fuel in the preceding fortnight and rupee-dollar exchange rate fluctuations. The same factors will now be applied for a daily revision. Reports by analysts have pointed out that daily changes in fuel prices will enhance the oil marketing companies’ ability to make gradual changes in prices avoiding any intermittent interventions, reduce volatility in earnings from sharp fluctuation in global petroleum prices during fortnights, and eliminate irregularities due to inventory management by dealers on expectations of revisions in fuel prices.

But it is still a baby step. For any meaningful effect, the government should go in for more substantive moves like allowing oil companies the freedom to set their retail prices independently and not in unison as is done now. That way the oil retail sector will be subjected to more competition and the sector will benefit along with its consumers. At present, prices set by the state-owned retailers do not reflect their cost of refining, or more broadly, their overall efficiency at doing the same job. Retail prices are arrived at by adding margins to the price per barrel without any link to the efficiency with which refining and distribution happens. That is why prices across retailers as well as across states differ by only an insignificant amount. So while there may be small changes to reflect the fluctuation in crude oil prices or the exchange rate, in essence what India has is a cartel of state-owned fuel retailers. That is because while diesel and petrol are deregulated, their pricing is still more or less managed. 

The crux of any reform in this regard lies in fostering competition, not just among the dominant state-owned retailers but also with private players. At present, there is no incentive for any of these refiners and retailers to improve efficiency, reduce costs and capture a greater share of the market. Taking advantage of low crude oil prices, the government has in the past deregulated diesel prices, reduced subsidies on cooking gas and kerosene, and shored up its tax revenues. The time has come to take reforms to the next level and bring about true competition in this sector.