Imperatives of petroleum prices

The issue of revising the retail prices of petroleum products has taken on the dimensions of an epic, or perhaps that of a soap opera?it just goes on and on. It is not as if there are any uncertainties as to where international crude oil prices are, or where they are headed. Of course, they do go up and down, just as would be expected from the most internationally traded commodity in the world. But they do so within a relatively narrow band of about $8 a barrel (/bbl). The lowest UK Brent has dropped to in recent weeks is just shy of $48/bbl. For the most part, it has been comfortably above $50/bbl. The cheaper Oman-Dubai sour crude has dropped below $45/bbl on a couple of days. But for the most part, it has ruled much higher and, on occasion, has crossed $50/bbl. That puts the average price of India?s crude basket at over $50/bbl. These are not notional prices, for over three quarters of our crude requirements are imported and Indian petroleum companies are incurring actual cost at these prices.

We, however, have not yet got around to revising our retail prices to reflect these costs. Kerosene continues to sell at half its production cost, and domestic selling prices of motor spirit, diesel and cooking gas continue to be below the cost of production to varying degrees. There is, without doubt, a large constituency for any scheme where goods are sold at below cost. Who, after all, wants to pay more, if there is an option? Just as who would ever want to pay tax, if the option of not paying readily existed? In the occasional case, the externalities associated with below-cost supply of goods and services are so large, that they can make sense. The obvious examples are public health, primary and secondary schooling and access to food for the very poor. While some kind of a case can still be made in defence of some subsidy for kerosene? the cooking fuel of the poor?subsidising petrol, diesel and cooking gas simply do not qualify for similar treatment.

The list of uses which can lay claim to special treatment is very long. And, the resources available to meet these ends are self-evidently limited. Which means that providing for some ends will deny many others. Every society, like every ordinary household, makes these choices on a continual basis. If re-sources are expended in subsidising petrol, diesel and cooking gas, some other end is being denied. And it is fairly easy to demonstrate that those which are being denied readily trump the pain that consumers of petrol, diesel and cooking gas might feel. Higher prices, per se, cannot be the basis for a policy of subsidy. There are many more people who buy vegetables and other groceries, than those that purchase refined petroleum products. If price alone is a criterion for social policy, then that implies a regime of price control?from diesel to potatoes. Socialist economics tried that for many decades, before the edifice came crumbling down. These things do not work, just as water does not run uphill, even if all of us were to wish that might happen.

The public sector oil companies are bearing most of the burden. The oil marketing companies are making a loss and much of it is being then passed on to the oil producing companies. Basi-cally, the petroleum producing and refining sector, one of the best-run components of the public sector, is being bled so that some politicians can bask in a glow of self-satisfaction, that they rescued people from the pain of paying a market-determined price for petroleum products. The left allies of the UPA government champion the public sector, both sick and solvent. It would, however, appear that they are more comfortable with the sick, and so, are perfectly willing to see the oil companies lose their financial health. Or, perhaps, they relate better to crisis than to stability, for crisis surrounds their very selves. Much as self-flagellating, hairshirt-wearing monks in the Middle Ages could see only sin surround them and too little of grace.

This episode of oil prices is a textbook lesson as to why government should never be involved in setting prices. If any good comes out of this, it would only be a recognition that politicians should stay far away from mundane matters that markets normally handle. Politicians and parliamentarians, quite wisely, leave the actual job of defending our borders to professional soldiers, though at the end of the day they control the defence establishment. And that is, indeed, the way it should be. Likewise they should leave commercial matters to professionals, and be satisfied to lay down the broad policy parameters and the expected outcomes. In the case of public sector companies, there is a world of difference between holding the management accountable for performance and trying to selectively usurp their managerial functions.

The post-APM (administered pricing mechanism) period envisaged a band within which oil marketing companies could automatically reset prices. If there is a wish to revise the scope of the band, then be done with it. But after that, please leave the stage, so that the rest of the system can get along with the job. Energy is a critical area, where inadequate capacity response is going to be a serious handicap to realising the growth potential of this economy. Emasculat-ing the public sector oil companies in a quixotic bid to play to an imagined gallery might yield a puny electoral harvest, but at enormous cost to the energy sector. And, in consequence, to the country as a whole.

The writer is economic advisor to Icra