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Monday, July 16, 2018

Go Slow On Oil

Rising crude prices are cause for concern. But they don’t warrant going back on deregulation, forcing OMCs to absorb losses.

By: Editorial | Published: April 16, 2018 1:21:03 am
us crude oil price, crude oil price, syria, syria airstrike, us airstrike in syria, chemical weapons, indian express In the last two months alone, Brent has gone up nearly a barrel or 16 per cent.

Oil is on fire again, especially with renewed instability in West Asia. On Friday, the day the US-led strikes in Syria took place, Brent crude futures closed at $72.58 per barrel, its highest level since November 27, 2014. In the last two months alone, Brent has gone up nearly $10 a barrel or 16 per cent. Yet, during this period, retail prices of petrol and diesel in Delhi have risen by just over Re 1 (1.4 per cent) and Rs 1.6 (2.5 per cent) a litre, respectively. Clearly, the Narendra Modi government does not want fuel prices to increase, especially with assembly elections in Karnataka less than a month away. It had, only last October, reduced the excise duty on petrol and diesel by Rs 2/litre each — and that was two months before the Gujarat state polls. With elections to Rajasthan, Madhya Pradesh and Chhattisgarh due in December, before the big one in April-May 2019, it looks unlikely that the state-owned oil marketing companies (OMC), over the next one year, would be allowed to fully pass on the rise in their imported crude costs to consumers. Alternatively, there could be further excise cuts by the government.

Both these are undesirable actions. Deregulation of transport fuel prices has been one of the Modi government’s notable reforms. The OMCs have, since June 16, even been revising retail rates linked to average international price movements on a daily basis, as against the earlier fortnightly system of adjustment. Such deregulation was, no doubt, enabled by low global oil prices. Between May 2014, when this government came to power, and January 2016, the average cost of crude imported by Indian refiners crashed from $ 106.85 to $ 28.08 a barrel and remained below $ 50 even till July. The true test of commitment to deregulation, however, is not when international prices are low, but when they start rising.While $ 70-plus crude prices are cause for concern, they do not warrant going back on deregulation and forcing OMCs to absorb losses. Under-recovery on sales of diesel and petrol is a UPA legacy definitely not worth emulating. The Modi government should, indeed, be given credit for not passing on the benefits of low international prices entirely to consumers and, instead, using it as an opportunity to mop up additional revenues through duty hikes and achieving fiscal consolidation. Squandering these gains and embarking on the road of populism in its last year would be imprudent. There is a case for bringing down excise duties to cushion the impact of rising global oil prices. But that point hasn’t yet been reached. For now, it’s the consumer who must pay. Higher prices are, moreover, a signal to consume less and wisely.

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