Petrol party

Politicisation of oil prices is now complete. What Ram Naik started during the NDA, what Mani Shankar Aiyar continued with gusto during his tenure as the oil minister in the UPA and what Murli Deora, Aiyar8217;s successor, is now doing, prove politicians won8217;t let the market determine the price of the country8217;s biggest import. Sonia Gandhi may have her reasons to ask for an oil price cut but the creation of a system where prices are not only administratively set but overtly politically administered, has a troubling potential. If today oil prices go down because of direct political intervention, tomorrow the need to raise domestic prices 8212; when global prices jump again 8212; will also be seen as a party affair. But because increasing oil prices is not popular, the government and the party may have an even more complex battle than they had the last time petrol became dearer.

Efforts to extract political capital from a commodity with volatile global prices ensure that the more familiar costs of non-market pricing get higher. Consumers will understand even less that oil prices need to reflect scarcity. The economy will be less prepared to handle costly oil. And the political sanctity given to price fixing reduces the momentum of general reform in the oil sector.

Politicians will gush protests on hearing this, but oil is not a public good that would not be produced if the government didn8217;t produce it. There is actually no economic rationale for a public sector in oil. Even if a case is made for a PSU like ONGC, which is now engaged in finding oil for India in the world, the vast public sector in oil has little justification. At the minimum, importing and selling petroleum products should have been freed by now. But even when some liberalisation has been attempted, for example in setting up oil retail outlets, the conditions have been too restrictive to encourage real competition. It is easier probably finding oil than a politician who understands oil.