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Worrisome oil prices : Need for a rational, transparent pricing regime |
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With concerns mounting over oil prices, the national oil refining and marketing companies are pushing for a substantial hike in the prices of diesel and petrol as well as a phase-out in LPG and kerosene subsidies.
Their view is that the Government’s refusal to increase product prices since January is affecting their bottomlines.
Petroleum Minister Mani Shankar Aiyar has announced that a decision will be taken on June 15 and a mechanism will be worked out on adjusting domestic petroleum prices.
Nevertheless, all indications emerging from the Petroleum Ministry point towards only a marginal rise in diesel and petrol prices, while subsidies on LPG and kerosene will be extended by another two years.
This is partly because of opposition to any price hikes from alliance partners of the ruling coalition, and partly because the Government would not like to hike domestic oil prices so soon after taking office.
While this is good news for the consumer, it is time for a reality check on the current oil pricing regime in the country.
On the face of it, the huge rise in international crude prices - from $29 a barrel in January to over $40 last week does make a clear case for a concurrent rise in domestic product prices. However, it is also clear that the abysmal lack of transparency in the domestic oil retail pricing mechanism pattern has created a situation which has contributed to the current confusion and debate.
A complex pricing structure that has been in existence since the dismantling of the administered price mechanism in April 2002 has allowed auto fuel consumers to be overcharged.
This includes the levying of a 20 per cent customs duty on diesel and petrol imports which, being notional, is however not passed on to the Government.
Moreover, although it cannot be denied that the oil marketing companies have seen a dip in their profits since January, high refining margins and a range of taxes still allow them a level of comfort.
As the Petroleum Secretary recently said product prices are not ad valorem and hence have a high incidence of taxes being imposed on them. The Government is now looking at various options which will allow the oil companies to keep their Bottomlines looking healthy - albeit less bloated - without overburdening the consumer.
These include rationalising and/or lowering domestic taxes, replacing the current ad valorem tax regime on auto fuels with a more specific excise duty and setting up a price stabilisation fund. Aiyar has also said that negotiations were on with OPEC producers to correct the anomaly in prices charged to Asian and OECD countries.
However, while all these may succeed in staving off a price hike in the near future, it’s time that the government puts in place a more rational and transparent pricing mechanism. Only then can the confusion prevailing in the oil sector give way to a more satisfactory and stable state of affairs.
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