The government’s decision on Friday to cut petrol prices by Rs 5 per litre and diesel by Rs 2 per litre over the weekend achieves a roll back of the price increases announced in June this year, though in the case of diesel the price cut is a rupee less than the June increase of Rs 3. In the case of LPG, the Rs 50 price increase per cylinder of June has not been touched. So there is evidence of moderation by the government in responding to declining crude oil prices internationally, bearing in mind the relative subsidy levels for the different petroleum products.
Indeed, when petroleum product prices were last cut in February 2007, global crude oil prices were at about $56 per barrel. Since then, there were domestic product price increases in June 2007 and February 2008, neither of which has been rolled back, although crude oil prices today are significantly lower than they were in February 2007. When there were price increases announced in February 2008, Mr Chidambaram, as finance minister, had declared that domestic prices had been made equivalent to a crude oil price of $66 per barrel.
If Mr Chidambaram’s calculations on price parity hold, then with crude prices having dipped now to less than $50, it might be argued that the government could have dropped prices further. However, there are two reasons why that parity does not hold. First, the rupee-dollar exchange rate has moved sharply against the rupee, so that what would have been price parity at $66 in February would now be a little over $50 per barrel. Second, there is an accumulated deficit that the oil marketing companies have to recoup, totaling over Rs 110,000 crore.
Calculations of what is price parity for the oil companies are of course notoriously complicated; indeed, it took the government itself quite a lot of effort to de-construct the claims of the oil marketing companies, and the truth seemed to be that the oil companies were making excessive claims when it came to the real extent of their burden. This background should be kept in mind when considering the oil firms’ claims even today that, at the new prices, they will continue to lose money. Such claims need proper verification, and the government owes it to the country to come up with a firm statement about whether there is any further deficit that the oil companies will need to incur at the new retail prices that have been announced.
Even more important, what the government should have done at a time when crude oil prices are low, and expected to stay low because of the global demand recession, was to free oil product prices from government control. If this was not advisable as a one-shot step, there could have been a calibrated push towards market-linked pricing, with a force majeure clause for deal with possible price spikes. The road map for this was laid a few months ago by the Chaturvedi Committee, whose report (as the ONGC chairman says) is “gathering dust” somewhere. How long will the government keep working on subsidy numbers, quarter-to-quarter, and keep issuing ad hoc directives while quibbling about the over-estimation of under-recoveries by the oil marketing companies? How long can the constituents of the oil economy — including consumers — lobby every quarter to get a larger slice of the oil cake? It should not take another report, or another government, to dismantle the administered price mechanism. This is the opportune time to do it, and the move would be popular too, if it brought some private refiners into the domestic market and resulted in the oil marketing companies actually dropping prices!
