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Fuel price control is back from the dead

Reliance Industries Ltd’s fuel retailers are facing a shortage of fuel, and fear the return of the 2008 scenario in which many private sector fuel retailers had to shut down their operations as global crude prices went through the roof and the government of the day decided to restrict fuel subsidy to state-owned oil marketing companies (OMCs) (REUTERS)Premium
Reliance Industries Ltd’s fuel retailers are facing a shortage of fuel, and fear the return of the 2008 scenario in which many private sector fuel retailers had to shut down their operations as global crude prices went through the roof and the government of the day decided to restrict fuel subsidy to state-owned oil marketing companies (OMCs) (REUTERS)

The spectre of political control is once again haunting India’s fuel retailers and those who bankrolled them, denting the profits of oil companies, hurting in particular private operators Reliance and Nayara Energy 

The spectre of political control is once again haunting India’s fuel retailers and those who bankrolled them, denting the profits of oil companies, hurting in particular private operators Reliance and Nayara Energy (Nayara is the name erstwhile Essar Oil’s Russian owners have given their acquisition).

Reliance Industries Ltd’s fuel retailers are facing a shortage of fuel, and fear the return of the 2008 scenario in which many private sector fuel retailers had to shut down their operations as global crude prices went through the roof and the government of the day decided to restrict fuel subsidy to state-owned oil marketing companies (OMCs). That meant that the fuel was significantly cheaper at Indian Oil, Bharat Petroleum and Hindustan Petroleum outlets, as compared to Reliance and Essar outlets, where the fuel was on offer at unsubsidized, market-linked prices. Indians, being rational consumers, preferred to buy fuel from subsidized outlets, avoiding fuel stations with market-linked prices.

State-owned oil marketing companies (OMCs) did not raise retail prices from November 2021 till after the results of crucial assembly elections were announced on 10 March this year, although crude prices moved up some 37.5% over this period. Assembly elections matter to the politicians, not to oil companies. Yet, state-owned OMCs held their prices, sustaining losses on their retail operations. Since state-owned OMCs held their prices, Reliance and Nayara had to follow suit.

After election results came out, state-owned OMCs have raised the price of diesel for bulk buyers by 24 per litre, while retail prices are being raised in dibs and dabs. Bulk buyers are the likes of state transport corporations, and telecom operators who deploy back-up diesel generators to keep their base stations going, when grid power drops off (which is why the telecom lines keep buzzing even during power outages).

Acting rationally, Indian bulk buyers of diesel are buying their requirement from retail outlets, defeating the stratagem of dual pricing. Refiners are faced with the prospect of continuing to make losses: the more the throughput through retail sales, the greater the relative losses they suffer. They also choose to be rational, and restrict sales, particularly private OMCs, which are accountable to their profits-focused investors.

Politically dictated price controls were supposed to have ended in the petroleum fuel sector more than seven years ago. Jet fuel (aviation turbine fuel or ATF), was decontrolled in 2002, petrol prices in 2010, and diesel prices were set on a course to reach market-price parity by letting oil companies raise them by 50 paise every month. Such parity was reached in October 2014, barely five months after the United Progressive Alliance (UPA) government, which had put this policy in place, lost the general elections and the BJP-led government took office after promising, among many other reforms, the policy approach of minimum-government, maximum-governance. After that, only kerosene and cooking gas were supposed to be subsidized, and even these subsidies have gradually been reduced.

Yet, when crucial assembly elections in early 2022 approached, state-owned OMCs ‘voluntarily’ gave up their marketing freedom and held petrol and diesel prices steady, regardless of the volatility in crude prices globally. This hurts the valuation of Bharat Petroleum Corp., slated for privatization.

When the rationality of the marketplace conflicts with the rationality of the electoral battleground, politics trumps ‘marketing freedom’.

Now, private fuel retailers, who face shortage of fuel from their bulk suppliers, face the brunt of price control by stealth. Private companies are accountable to their shareholders, who see no reason why it is their job to subsidize fuel prices, taxes and subsidies being the legitimate domain of the government. If they cannot get a decent return on their investment, we would see the return of market dominance by state-owned OMCs, and trouble for the banks that lent to private fuel retailers to help them set up shop.

Price control was supposed to have been killed in 2014, but it has come back to haunt India’s oil industry. It is high time the government finds the courage to let marketing freedom thrive instead of sacrificing it for electoral gains.

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