A dilemma called oil

That, however, is not their total loss. They have to also pay sales tax to the state governments. In Mumbai, this tax is Rs 10.6 per litre and Rs 7.1 per litre for petrol and diesel respectively. Thus, the total cash loss suffered on account of the sale of 1 litre in Mumbai is Rs 13.7 and Rs 25.1 for petrol and diesel respectively. This is, in other words, the amount by which prices would have to be increased at the retail outlet for the companies to simply break even on a cash basis. Such a hike is, of course, out of the question.

The logical solution should be a package that combines a price hike with a reduction in the central and state tax rates. After all, central and state taxes account for 32 per cent (diesel) and 50 per cent (petrol) of the price build up. But logic gets tossed aside in the face of turf and power battles. The finance ministry will not forego its windfall gain; the top leadership will not force a compromise between the petroleum ministry and the finance ministry. And the Central Government does not have the clout to compel the state governments to countenance a reduction in their revenues.

The consequence of this stalemate is now coming home to roost. The Oil companies are, of course, close to bankruptcy. But more egregiously, we are now seeing a distortion in energy consumption patterns. The domestic price of diesel is today less than the price of furnace oil (internationally among the cheapest of products that come out of a refinery). This is encouraging a switch from furnace oil to diesel and in consequence a sharp hike in the consumption of diesel. Its demand growth is now exceeding 20 per cent per annum. The ‘dieselisation’ of the economy is also making a mockery of efforts to secure energy independence.

Everyone will have to bear the implications of adhocism in policy. This must not, however, take away from the urgency of mitigating the longer-term consequences. Even amid the twists and turns of current policy my hope is that the government will look to placing petroleum policy within the bounds of a more sensible economic and pricing framework. What should be the drivers of such a framework?

First, we should accept that high oil prices are here to stay. This does not mean we will not see sharp declines from present levels. What it does mean is that we will not see prices stabilising at levels significantly below a triple digit number. Second, we must create a mechanism that leads to a ‘graduated’ reduction in subsidies, an orderly alignment of domestic prices to international levels and a more efficient disbursement of financial support to the poor. Third, we must reverse ‘dieselisation’. And finally, we must recognise that the sine qua non of energy security is a robust and competitive domestic petroleum and energy sector.

... contd.

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