Needed: a decision

The last revision in petrol and diesel prices took place on December 31, 2003. And for kerosene supplied through the public distribution system (PDS) and domestic liquefied petroleum gas (LPG), there has been no price increase since March 2002.

Yet, the price of crude oil has risen from $27 per barrel in December 2003 to around $41 per barrel now. Also, the administered price mechanism (APM), created in the 1970s to regulate petroleum product prices, was dismantled in April 2002 for all petroleum products, except PDS kerosene and domestic LPG.

So the oil marketing companies have been technically free to hike petrol and diesel prices. That they did not use this freedom is an eloquent comment on how the Vajpayee government retained backdoor control. Now there is a new government at the Centre, but the same mindset prevails. The oil companies are still waiting for the government's green signal.

The petroleum minister argues that the problem lies in the finance ministry, since ad valorem duties on rising oil prices give the government a tax collection bonus. The customs and excise rates for the most part are reasonable, ranging from 10 per cent to 30 per cent.

But the petroleum minister has a point, there is room for considering a fixed duty structure when prices are so volatile. But it is a limited point, because no amount of duty correction can deny the need for jacking up retail prices. Part of the problem is that petroleum product pricing remains shrouded in mystery.

It is time the oil companies make full disclosure of the various formulae they use to determine their refinery gate prices and margins. This will tell the country how much of the retail price is the cost of crude, how much goes to the government as tax, what are the refining and trade margins, which way the cross-subsidisation of products works, and so on.

Without this information, no one outside the government (and perhaps no one in it) can take a fully informed view of the correct course of action.

What the oil companies do claim is that their average cost of crude oil and refining has gone up to the equivalent of $34 per barrel. This, they say, has wiped out their marketing margins.

Removing the Rs 6 per litre surcharge on petrol and the abolition of the cess on domestic crude oil (two proposals that have been aired) might kill two birds with one stone: the price hike for consumers gets moderated, and the oil companies get compensated.

But the government, which gets more than a third of its total tax revenue from petroleum products, may be reluctant to go down this road.

However, at a time of unusually high prices, the way forward would be through a combination of price increases and duty set-offs. The next step should be to take oil pricing firmly out of the government's purview. Having dismantled the APM, the government should give the oil navratnas the autonomy that the finance minister has promised.