One key assumption in keeping fiscal problems from getting out of hand, so far, has been that international oil prices will not breach a certain band. While the Union government has never disclosed its zone of comfort on this count, one widely held estimate is that of $90 per barrel of crude oil.
The assumption of international crude prices not breaching the zone of comfort has been proven, time and again, to be wrong. Spot oil prices, too, have hardened in the last five-odd months. Since the decision in June to deregulate prices of petrol, crude prices have risen by nearly $10. On Monday, these prices inched to a 26-month high.
Oil for January delivery at the New York Mercantile Exchange hovered around the $89.35 mark. There are estimates that peg oil prices close to $120 per barrel by end-2012. But even discounting for such doomsday scenarios, one thing is clear: Oil prices are hardening and will continue to harden.
It is time the government deregulated diesel prices to ensure that under-recoveries on this count don’t blow a hole in its finances. While under-recoveries from petrol have come down dramatically, those from diesel continue. Even if international oil price increases are not factored in, the under-recoveries from the entire fuel sector (petrol, diesel, LPG and kerosene) would still be in the range of Rs 53,600 crore. This is based on the assumption that crude prices will be around $79 per barrel. That assumption is, as of now, out of order.
It can arguably be said that even if crude prices touch $90 they will not immediately set government finances on fire. True. But it takes a long time for the government to factor in the political implications of any fuel price rise before it is able to take a decision. For example, it was months after the Kirit Parikh committee on fuel pricing submitted its report that the government took some action.
Oil secretary S. Sundareshan said as much on Monday. “We are not going to the empowered group of ministers now,” he was quoted as saying by PTI. “I think it is extremely difficult for the government to pass on the entire burden (of moving to a free-price regime) to the consumer,” he added.
What he did not say was that this was at the cost of choosing other difficulties in the time to come.
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