It is considered possible that the government is on the verge of lifting its control and moving towards a market price mechanism for petroleum products. Officials and politicians associated with the relevant ministry have also murmured such possibilities. This is not unbelievable: after all, it isn’t the first time such a decision has been made. The previous government did lift such controls in April 2002, only for the current regime to re-impose them in 2004. Broadly speaking, when such decisions are being evaluated, there are two aspects to consider: the first is intent and the second is consequence. What is the intent, here, of the government in turning over petroleum products pricing to the market, and what are the likely consequences?   

Administrative controls were re-imposed in 2004 when the prices of crude oil had risen steadily and reached $37 a barrel, which were then considered stratospheric levels. The newly-elected government of that time lost its spine and deferred passing on the price increase to the citizenry. Re-imposition of controls implied that folks did not need to pay uncomfortably high market rates. Between 2004 and today, crude shot up to $147 a barrel (July 11, 2008), retail prices of petroleum related products were increased (2006), decreased (2007), increased (2008) and then decreased (2008) again. Fast-forward to January 2009, and we are on the cusp of a general election while crude prices are hovering at about $40 a barrel. Electoral logic implies that the government should shell out largesse to the citizenry and ride partly on that to victory at the polls. This can be achieved by reverting to a free-market pricing system in order to take advantage of current low market rates of crude oil. It all seems to be a tailor-made situation. Except, like all tailor-made situations, there is a catch: can one fool all the people, all the time — or at least, how many times? Does the government honestly intend to follow market prices? Are they willing to make the citizenry pay market rates should crude oil shoot up again? Are they willing to subject the economy to the extreme volatility in energy prices that we have been witnessing and are going to witness?  

... contd.