Oiling the way

The increase in the price of petrol, diesel and gas was long overdue. The price should have moved much earlier with the increase in international oil prices witnessed in the last few months. But domestic prices did not change. This happened despite the fact that the prices were supposed to be determined by oil companies and not administered by the government.

In fact, the Administered Price Mechanism APM for petroleum products was dismantled in April 2002. The objectives of making the prices of petrol, diesel, kerosene and LPG market determined were many. It sought to reduce the subsidy given to these products. It was hoped that bringing relative prices of these products in line with costs and removing cross-subsidies would reduce the incentives to adulterate diesel and petrol. It was also hoped that this would prevent the trend towards inefficient technologies such as diesel fuelled cars. If prices moved slowly up and down, it would reduce the shock to the economy which comes when there is a one-time price hike. This would give the economy time to adjust and minimise the damage. Consumers would accept price hikes more easily when they saw daily movements of prices in both directions. Most importantly, the dismantling of the APM was expected to depoliticise prices of petroleum prices. However, two things went wrong. First, since the owner of the oil companies continued to be the government, decisions about prices became the domain of the petroleum minister. Not only did oil companies act as a cartel, increasing or reducing prices at the same time, they also acted in the interests of the party in power. This created the present situation where prices were not raised before the elections in order not to reduce the popularity of the party in power. Second, the oil sector was piled with taxes beyond reasonable levels. The government does not release data on excise collection according to POL petrol, oil, lubricants and non-POL products. However, it is believed that about 1 per cent GDP is collected as tax on POL products. The reduction in taxes on POL products is a move in the right direction. What is needed next is rethinking on taxes on all carbon fuels to reduce distortions.

At the same time, there is a need to renew efforts to depoliticise the prices of petroleum products. Oil companies should not be allowed to act as a cartel. It is only daily ups and downs in the price of petro products differing across companies that can provide the long-run solution to the problem.