The curious case of India's oil policy

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Sushma Ramachandran | 25 Aug, 2008
India's petroleum policies are getting curiouser and curiouser. The latest report on the oil sector by former petroleum secretary B.K. Chaturvedi has proposed a phased raise in oil product prices so that eventually, domestic retail prices are brought on a par with international levels. This is surely an Alice in Wonderland proposal.

In the past, even a small increase in prices of kerosene, diesel and gasoline has taken months to implement, with numerous inter-ministerial meetings, followed by talks with the prime minister and finally ending with an approval by the cabinet.

The reason is simple. Oil prices are a political hot potato. Every politician knows that even a small hike in prices could prove suicidal for poll prospects. In such a scenario, for an official panel to blithely recommend a monthly rise in oil prices appears to be somewhat unrealistic, to say the least.

Besides, the panel must surely know that this is an election year and inflation is already raging at much above the 12-percent mark.

The chances of the United Progressive Alliance (UPA) government accepting any suggestion to impose further hike in fuel prices on the common man appears fairly remote.

Petroleum Minister Murli Deora has thus taken no time at all to reject outright the report's recommendations. Apart from the political angle, it also does not make much economic sense to talk of passing through international levels of oil prices to the domestic market right now as this would definitely create further inflationary pressures.

In the long run, of course, it is a desirable aim that domestic prices of oil products are not subsidised and there is a linkage to world oil prices. At the same time, given the volatility of the international oil market, a system has to be put in place that would provide stability to consumers instead of exposing them to rapidly changing fuel prices.

It would definitely be a more fruitful exercise for the government to ponder over the need for a long-term policy that would provide a modicum of stability for consumers while ensuring that subsidies are transparent and built into the system.

Some interesting proposals on the subsidy issue have already been made by the C. Rangarajan panel, which had suggested that smart cards be issued to those below the poverty line so that they can avail themselves of kerosene at subsidised rates.

This would replace the existing system of providing kerosene at subsidised rates through the public distribution system, where inefficiencies and the corruption it has generated are legendary.

Even representatives of Left parties who have fought fiercely to protect the supply of subsidised kerosene to weaker sections concede there is tremendous leakage and adulteration in the existing mechanism.

While evolving such a policy, it would be useful to look at the existing oil pricing system in a realistic context.

First, despite the talk of huge under-recoveries - retailing fuel products at below cost - the same entities are making higher revenues by what are known as refinery margins.

This represents the amount oil companies make by processing crude into several different products. The refining margins go up along with the price of crude. So oil refining and marketing companies are also making some gains along with the losses on sale of products at prices below production costs.

Second, all oil products are not being sold below international market levels. Prices of industrial products like LSHS (low sulphur heavy stock) and bitumen as well as aviation turbine fuel are reviewed every fortnight and the prices are altered accordingly.

And finally, the country does not import all its crude requirements.

About 25-30 percent is still being produced within the country. The national oil producing companies like Oil and Natural Gas Corp (ONGC) and Oil India Ltd are paid international prices for this crude, which explains their soaring profits.

This does not mean to say that the domestic oil companies are not facing a crisis. It simply means that there are many facets to oil pricing and all this needs to be studied in depth, preferably by industry experts rather than by bureaucrats, before reaching any final conclusions.

The Chaturvedi Committee has certainly examined most of the key issues but oil companies are opposing proposals like the one on export parity pricing, as it would reduce refining margins.

In the past, the then petroleum minister Mani Shankar Aiyar had formulated a band system of pricing, which envisaged domestic prices going up or down automatically in case of volatility in international markets.

Unfortunately, the entire plan had to be peremptorily abandoned when world oil prices far exceeded projections. It really means that it is time for the government to look at the long run, taking into account the fact that world oil prices may continue to remain in the region of 80 to 100 dollars per barrel for quite some time.

The other issue that is not being talked about lately is the need to step up indigenous exploration efforts. Normally, high oil prices spur exploration efforts since this makes such high cost projects more viable than ever before.

Despite the sector's regulator, the Directorate General of Hydrocarbons (DGH), insisting that the subcontinent is highly prospective as far as petroleum is concerned, there has been a relatively poor international response to various oil exploration bidding rounds in India.

In fact, Indian companies like ONGC and Reliance Industries have made the maximum effort in this area. Even the huge gas discoveries off the Krishna-Godavari basin in Andhra Pradesh and off the Gujarat coast do not seem to have lured the oil majors to our shores.

The reasons for this lack of interest need to be examined as well as the validity of the reports claiming high prospects in our region.

As for the Chaturvedi panel report, it is clearly not acceptable to the petroleum ministry or the oil companies in its present form.

It could, however, serve as the basis for another committee to look at the entire oil scenario and present proposals for a long-term energy policy. Such a policy is urgently needed, given the vagaries of the international oil market.

It is true that no strategy can cope with world oil prices reaching heights of $150 dollars per barrel. It is also equally true that a policy is essential to review the country's overall energy deficit and consider ways to overcome this shortfall over the next decade.