Beyond proper fuel pricing

Beyond proper fuel pricing

The effects of the flaring global price of oil are being felt by Indian consumers in a rather subdued manner. A good part of the blow is being borne by the government and its oil companies. The politics of raising prices of mass consumption fuels such as petrol, diesel, LPG and kerosene is such that there is tremendous inertial resistance in the ruling coalition. Looking beyond this Gordian knot, however, one can say the solutions being pursued by the government appear to lack conviction. No doubt, attempts by government-owned companies to secure oil and gas equity overseas have been renewed and there is talk of creating a fund to further this cause. But, if one considers the collateral effects of the rising oil and gas prices and that of melting existing long-term contracts, this approach is fundamentally questionable. In fact, India has been at the receiving end of this “resource nationalism" as recent as this month when Oman sought to quadruple the price of gas supplied to a fertilizer plant that feeds the domestic market. Oman had originally committed to a 15-year fixed price contract in 2005. It is also important to find the right domestic solutions.

Besides avoiding policy flux, the government should offer a liberal fiscal regime—with appropriate caveats—in designated areas where the chances of finding oil and gas are high. This will help attract larger and serious firms. And, over time, once significant discoveries are made, the fiscal terms should be pared. Then, in these areas, only companies with minimum satisfactory “strike" records should be allowed to participate. For a rogue bid could drive away serious players.

But most importantly, the government needs to devote some time, effort and thinking to policy priorities in this area to devise optimal solutions instead of the ad-hocism that prevails now. This never pays and energy security is too important a task to be trifled with.

Illustration by Shyamal Banerjee/Mint

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