Letting oil flow freely

Letting oil flow freely
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First Published: Mon, Jun 16 2008. 01 06 AM IST
Updated: Mon, Jun 16 2008. 01 06 AM IST
Petrol prices have finally gone up. It is encouraging to see the government has taken a step it should have taken long ago. Crude oil price is now close to $130 a barrel and there are predictions that say it will go up to $150 a barrel by the year-end, if not to $200 a barrel.
In the 1960s, oil was sold for around $3 a barrel till it jumped up in 1974 and started selling at about $10 a barrel. The West Asian economies started flourishing and a wave of migration from countries such as India started. In 1979, oil prices tripled, and another wave of migration followed. In the 1980s, oil prices steadily came down and by 1998, oil was selling for less than $12 a barrel. In this decade, oil prices went up again, $42 in 2004, $53 in 2005, $58 in 2006, $64 in 2007 and now rising almost every day.
How long can a government keep prices low? It is bad enough that prices were not increased two years ago. As a result, today the government and its oil companies are subsidizing the fuel bill by nearly Rs2 trillion a year. More such losses will mean two things. Firstly, oil companies will not have money to import crude oil, giving way to shortages and the kind of queues for petrol the BPO generation has never seen. Secondly, the government will be unable to spend money on infrastructure and development. In this context, the new decision to increase prices and reduce taxes is a brave one as it has come at a difficult time, when the government is getting ready to face elections next year. This bold decision is something that all parties criticize, but none of them has offered any solution. There is little oil in India and extracting it will be at least twice as costly?compared?with?importing it.
So what is going to happen now? There is fear that inflation will go up again. Taxi fares will go up. Transportation costs will increase and wages will go up as employees will demand more money to tackle price rise. On the one hand, rains are around the corner. Demand for electricity will come down, food prices will decrease and, therefore, overall inflation will come down. Therefore, the average price rise should not be much. On the other hand, the rupee has weakened. From Rs39 a dollar, it has now gone down to Rs43 a dollar as the oil bill has increased. It’s difficult to say if it will go down further or will now strengthen as the international political climate is also uncertain.
What should the government do now? Clearly, it’s a bold move fraught with political danger. It should be understood that even now the prices of petrol and diesel in India are lower than their prices in developed countries and equal to prices in most developing countries. What has been done should be taken forward.
Firstly, there is an urgent need to cut customs duties on petroleum and petroleum products and convert ad valorem duties into volume-based duties. Secondly, it’s time that diesel subsidies are removed. There’s no need to subsidize cooking gas for the middle class and the rich. Subsidies in fuel will have to be targeted for the poor.
Finally, why should there be different playing fields for public and private players? When the government lets go of the petroleum sector, it achieves two objectives. The first one is efficiency that we see whenever any exclusive public sector space is opened to private competition. The second, that’s more important in the political space, is that people no longer blame the government for price rise in a competitive sector.
Today, airfares are going up, cement prices are increasing and even electricity tariff hikes are taken in their stride by customers who know that there are private players in these markets and the government has little or no role to play. If the oil and fuel sector also is seen as such, there will no demands for keeping prices low.
Amir Ullah Khan is an economist at the India Development Foundation. Comments at otherviews@livemint.com
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First Published: Mon, Jun 16 2008. 01 06 AM IST
More Topics: Crude | Oil prices | Inflation | Diesel | Custom duties |