The government should take advantage of the respite in oil prices and establish a transparent, predictable and durable mechanism for setting petroleum product prices. The fact that they have not done so yet may be because of politics but also perhaps because of a fundamental ambivalence towards competition in the petroleum sector. Certainly the twists and turns in pricing policy over the past several years has suggested that the government is not unequivocally supportive of the involvement of the private sector. Their policies have effectively emasculated competition. The purpose of this article is to urge the government to clear this ambivalence.
The generally accepted wisdom is that competition is desirable and that market forces foster innovation and efficiency. I subscribe to this view but I also accept that competitive markets do not inevitably lead to efficient markets. Competition is vulnerable to being undermined through collusion and cartelisation. Indeed, even Adam Smith, the apostle of free markets, acknowledged that ?people of the same trade seldom meet together even for merriment or diversion but the conversation ends in a conspiracy against the public or in some contrivance to raise prices?.
The central issue is not therefore whether there should be competition or not. Is it the substantive intent of policy? What does the government really want? Does it want private sector involvement and if so across the entire value chain from exploration and production to refining and marketing; or only in selective segments or does it wish to return to the command and control dirigsme of earlier years? Today there is too great a gap between rhetoric and reality.
The notification has not been overridden by further cabinet decisions. It continues to define the current de jure policy. The de facto reality is, of course, very different. The government has reintroduced administered pricing of petrol and diesel and it has not removed the susidies on LPG and kerosene. This in itself does not skewer competition. All players can still be treated equally even under the current circumstances of re-regulation. Competition gets circumscribed when the rules of the game favour one group over another. This unfortunately is the case today. The government has ?used? re-regulation to tilt the playing field towards the public sector. Thus for instance, the government companies are granted oil bonds to compensate them for the losses that they incur on account of the differential between the ?administered? selling price of products and the international cost of procuring the crude. The private sector does not receive any such compensation. The consequence has been the almost total retreat of the private sector from the oil products market. What adds grist to the mill is the fact that private companies had to invest Rs 2,000 crore in prescribed oil industry infrastructure to secure the marketing licence and they did so on the assurance of comparable terms and conditions with public entities.
The price of international oil has currently slipped into our comfort zone. It is not, however, likely to remain there indefinitely. Anyone with a historical bent knows that the oil industry is cyclical and that prices will slip out again. No one knows when this might happen; nor at what pace. But everyone must realise that when it does happen, the government should not confront the same financial conundrum that it faced over the past several years. The hard truth is that if the government does not have a well-defined and clear policy for product pricing the next time oil prices start to rise but instead responds in the adhoc fashion that it has so far shown, the damage to the entire industry will be irremediable.
A clear policy mechanism cannot be derived unless the decision makers clarify their thoughts on the nature and extent of desirable competition. A related but equally important outcome of clarity would be to remove jurisdictional ambiguities surrounding the role of the petroleum regulators. Today there are two regulators?one for the upstream (exploration/production) and the other for the downstream (refining, marketing and gas). Their roles and responsibilities have been explicitly set out but despite that there is still considerable ?noise? and tension between the ministry and the regulators. One gets the impression that whilst the government has appointed these regulators to foster competition, it remains reluctant to give them the tools and substantive freedom to secure that objective. There is no sanctity about competition. But there is sanctity about clarity. Confusion in policy is regressive, not simply for the companies but also for the consumers and the government.
?The author is chairman of the Shell Group of Companies in India. These are his personal views
