With the price of the Indian basket of crude oil hovering around $63 a barrel, the possibility of a price cut is very much on the cards, especially now that election schedules have been announced for important states. While a price cut will go down very well with people who have been struggling to cope with inflation, it would be irresponsible on the part of the government to cut prices. For one, even if the price of the Indian basket of crude comes down to what is called ‘break-even’ levels (around $61, at today’s exchange rates), at which the state-owned oil marketing companies don’t lose any money, who is to say that this price level will be maintained for any length of time? Opec producers are meeting later this week and could well take a decision to cut output in order to keep prices high. Even if they don’t, a fall in the value of the rupee cannot be ruled out, thereby lowering the dollar break-even price. Everyone knows that while it is easy to cut petro-product prices, it is near-impossible to raise them because of the political headwind. The last time oil prices were raised, by a fraction of what was required, it was only after the oil companies said they had just enough money to import crude oil to last them a few days. All of this argues strongly in favour of the government watching the market for some weeks, to confirm current price trends.
Second, thanks to the government policy of not allowing domestic oil prices to rise in sync with international ones, both the exchequer and the state-owned oil marketing firms have taken a hit of Rs 1,20,000 crore or more, in terms of under-recoveries and government deficits, not to mention the loss of market capitalisation because of the fall in the oil marketing companies’ share prices. Even if international oil prices were to fall below break-even level, and yield a surplus at the current domestic retail prices, the government should leave things alone until some, if not all, of the losses incurred so far are recovered. There is no political price to be paid through this course of action because everyone has got used to the current price level for oil products.
Since oil prices will remain volatile, and oil product prices are very sticky on the way up, and given also that the policy of price decontrol has been given up completely, it is perhaps time to revive the old oil pool account of the 1980s and 1990s. This was a price smoothening mechanism that served to maintain a steady price of petroleum products, making profits on some while subsidising others — in the Indian context that typically translated into making profits on the sale of petrol, breaking even on diesel and losing it on kerosene. So, if the price of the Indian basket falls and oil companies start making money, a large part of this can be put into the oil pool account; whenever prices of crude start rising, as they must at some stage, the government need not hike prices immediately and can use the profits of the oil pool account to smoothen domestic prices. Unlike the 1980s, though, the oil pool account need not cover all oil products. The ones that are already sold at free-market prices, like aviation fuel, can continue to remain out of it.
