The price of Brent crude rose close to $25 per barrel on November 18. This followed the announcement by the oil-producer troika (Saudi Arabia, Venezuela and non-Opec Mexico) that production cuts will be maintained till next March-end. Oil prices seem slated to rise above the current high in the winter when oil consumption increases in Europe and North America. It is difficult to say how much prices will harden. The first world has been accumulating oil stocks for the winter.Buoyant prices will make it worthwhile to start producing from capped wells. And non-cartel producers could step up output. Crude prices may not hit, say, the $30-per-barrel-mark, judging by available December-January forward rates, but even a price of $25-26 per barrel will spell trouble for import-dependent India.
The current price of diesel (hiked by 40 per cent last month) is based on a crude price of about $23 per barrel. Prices of LPG and kerosene were not marked up along with diesel. If the imported crude price averages around$25.50 per barrel, up 10 per cent over the price of early October, the price of diesel in India will go up correspondingly; and prices of some oil products will have to bear an even sharper increase.
Oil product prices in India are, however, already stiff; a fresh increase will be resented not only by the general public but also the truckers and the railways as well as the industry including sectors using naphtha and furnace oil. The argument that product-prices have to be increased because of an exogenous rise in the price of crude will not wash. The consumer pays much more than the mark up over the basic price of crude warranted by costs of transportation, refining, marketing and distribution.
Excess payment is enforced through ad valorem import duties (20 per cent on crude and, for example, 10 per cent on LPG and 5 per cent on kerosene) and excise duties on the entire range of products (kerosene and LPG: 8 per cent, HSD and LSD: 16 per cent, petrol: 32 per cent and so forth). On top of these, there arelocal taxes.
Heavy, and rising, duties make no sense in a regime of buoyant oil import prices. The minister of state for petroleum Ram Naik has sensibly called for a change in the duty structure. Both import and excise imports must be lowered, and ad valorem rates replaced by specific duties. That may enable a reduction in, say, diesel prices (at the margin) and in the order of increase required in the price of kerosene. High oil prices are unfortunate for the country but a bonanza for the finance ministry. The anomaly must be corrected to make oil prices bearable.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.