Oil prices in context

The government will soon come out with its decision on oil prices. As this paper has shown through a series of reports last week, petro-product prices should be seen in the context of the profits made by the oil companies, and the revenue earned by the government from this sector.

While the basic price of petrol, to cite one example, is Rs 14.50 per litre, the central government levies duties of around Rs 13 and the state governments another Rs 7.

Much richer consumers in the US pay only a quarter of these sums as taxes on petrol. It doesn't help that money is squirreled away by both the government and the oil firms under a variety of false pretexts.

Non-transparent structures like oil pool accounts and import parity pricing have helped them get away with this, without the consumer being any the wiser. This must change, not get re-born.

If the Kelkar recommendation of free oil pricing is to work, though, cartelisation by the oil firms must be prevented. Today, the consumer has no way of knowing the basis on which prices are fixed, as there is complete opacity in the pricing formula.

For the record, oil marketing companies are paid "international oil price" parity prices, but all manner of items are added to this. To cite one instance, the international price parity formula assumes all crude is procured at international prices.

Yet, the fact is that 30 per cent is procured from ONGC at lower than below international prices, but this is not factored into the calculations.

That is why the proposal to have the biggest marketing company (IOC) owned by the government, and the others (HPCL and BPCL) run privately, made sense as competition would have ensured lower retail prices.

Theoretically, a regulator can take care of cartelisation, but the country has seen that where government companies are concerned, regulators tend to favour cost-plus solutions.

If the government chooses, unwisely, not to revisit the issue of privatising HPCL/BPCL, two other steps are possible. One, force the public sector oil companies to separate their accounts in a meaningful manner, so that consumers know how much profit is being made in the refining and marketing segments.

With today's complete black-out on publishing these costs, no one is in a position to say whether the refinery and marketing margins are adequate or extortionate. The other area that needs to be fixed is import duties.

Today, while the oil firms are promised international oil parity prices, this includes a 20 per cent import duty. But when the import duty on crude oil is 10 per cent and that on petroleum products is 20 per cent, the refining/marketing firms get 10 per cent additional protection on the value they create by refining crude oil.

In effect, the extra protection they get is more like 60 per cent of this value addition. To stop this, the government needs to move back to the single import duty rate for crude as well as petroleum products that was prevalent in the mid-1990s. Apart from being poor economics, a dual import duty structure is anti-consumer.