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Deregulation of oil prices critical

Deregulation of oil prices critical
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First Published: Wed, Feb 23 2011. 10 23 PM IST
Updated: Wed, Feb 23 2011. 10 23 PM IST
Prices of oil and non-oil commodities rose considerably in 2010 in response to strong global demand and supply shocks for select commodities. Crude oil prices, after averaging $97 (Rs4,384) a barrel in 2008, declined to $61 the following year.
But, in 2010, strong demand growth, especially in countries that are not a part of the Organisation for Economic Co-operation and Development (OECD), again pushed up crude oil prices to an average $76 a barrel. Currently, crude oil is trading in the international market at $87 a barrel (West Texas Intermediate, or WTI, crude futures) and $102 a barrel (Brent). According to estimates, the upward pressure on prices is likely to persist in 2011. Global oil demand during 2011 is expected to go up by 1.7% to 89.1 million barrels per day (mmbopd).
The crude oil forward curve for WTI indicates a long-term price nearing $98 per barrel. In India, oil prices move in tandem with the trends in the international market. After dipping to an average of $69 per barrel in 2009-10, the Indian crude oil basket is currently pegged at $79 per barrel.
Deregulation of petroleum prices
In June, after recommendations from several expert groups, the government deregulated petrol prices while maintaining status quo on other sensitive petroleum products with partial price revisions. Since then, marginal price changes have been effected on sensitive petroleum products.
In spite of periodical price revisions, there is an under-recovery to oil companies across all the sensitive petroleum products. In the current fiscal year, oil marketing companies are estimated to record a revenue loss of Rs72,000 crore. As per the agreed one-third sharing formula, till date the government has reimbursed Rs24,000 crore in two tranches and another Rs14,400 crore has been paid by upstream companies by way of discounts. Oil marketing companies are not in a position to bear more than Rs12,000 crore of revenue losses and the government would have to compensate the overall shortfall of Rs36,000 crore.
Burden of taxes
Taxes and duties continue to dominate the pricing structure for petrol and diesel. For petrol, an excise duty of 27%, sales tax of 17% and 1% custom duty accumulate to 45% of the selling price in Delhi. For diesel, an excise duty of 10%, sales tax of 12% and 3% custom duty aggregate to a quarter of its selling price.
India’s current policy and fiscal framework cause significant distortions as these undermine the financial strength of national oil companies, dissuade much-needed investment in the energy sector, and mitigate the operation of a market-based environment.
Deregulation of prices is, therefore, critical. This will require revamping the tax structure, which today constitutes 25-45% of the selling price of the fuels. In parallel, the government and the petroleum and natural gas regulatory board need to provide a renewed thrust to the development of city gas distribution projects, the creation of a national gas grid, and incorporation of natural gas in the proposed goods and services tax (GST) reform. This will enable a shift in the energy mix from the scarce and price-volatile oil to the relatively abundant natural gas. The energy policy will need to continue to provide fiscal stimulus to the supplementary effort for induction of energy efficiency programmes and expansion of renewable sector. Energy efficiency is expected to yield significant lowering of petroleum requirement per capita of gross domestic product (GDP).
The cumulative impact of a reform in the energy sector can help attract billions of dollars in investment, improve market efficiency and competitiveness, boost the creation of skilled and semi-skilled employment, and deliver much-needed energy for driving the economy to a double-digit growth trajectory.
Gokul Chaudhri is a partner at BMR Advisors.
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First Published: Wed, Feb 23 2011. 10 23 PM IST