India: Oil prices can’t be ring-fenced

The relentless rise in the international price of crude has put the government in a tight spot. The price of the Indian crude basket (a mix of Dubai and Brent) based on which current domestic prices are fixed has gone up from $58 a barrel to an average of $72.31 a barrel. Logically, therefore, domestic prices too must rise. After all, there is no reason why the domestic price of petro-products should remain unchanged when the international price of crude has risen and we import more than 70% of our crude.

Except that oil prices in India are not about economics or logic but about political expediency. Consequently, while the government was quick to pass on the benefit of a fall in oil prices in February in response to concerns about rising inflation, it seems less inclined to raise prices now in response to rising global prices.
The present government is not an exception. Successive governments have shown little willingness to rock the boat on the administered price mechanism (APM), under which the price of petroleum products is fixed by administrative fiat with little regard to international oil prices. The NDA government tried and even took a decision to dismantle the APM; but failed miserably when it came to matching words with action.

Unfortunately, this asymmetric response exacts a huge toll on the economy. First, price signals are suppressed, so the normal demand compression that happens with any commodity when its price goes up, does not happen with petro-products. Second, oil-marketing companies (OMCs) are forced to sell below cost; they are now reportedly incurring a daily loss of Rs 195 crore. In a bid to ease OMCs’ problems, the petroleum ministry has demanded that oil bonds be issued as compensation.

Economic Times