Sunday, 23 February 2020

The Cruel Petrol Price Hike

Updated: June 9, 2012 10:48 am

I am writing this column not exactly with the best of mental state. I am terribly confused over a personal decision that I had taken a day before—that of buying a new car to replace one that is nearly 10 year old. My car-dealer wants a quick decision, but I have sought a two-hour respite by giving the pretext of writing this column!

Should I buy a car in the wake of yesterday’s hike of petrol by over 10 per cent, the steepest ever in the history of independent India? I cannot afford a diesel-run car, which is much more expensive. One is told that the diesel price will also go up, though that hike would not be as substantial as it is in the case of petrol.

The Central Government says it did not have a hand in the hike of petrol since the commodity had been deregulated and that the oil PSUs are free to determine price as per market norms. The government also informs that these PSUs were incurring heavy losses as the price of crude in international market had gone up considerably. Their problems were said to be compounded further by sharp depreciation of rupee in recent months. In sum, the government’s point is that it would no longer subsidise the “Rich” for their petrol-run cars!

I must admit that I am not a student of economics and have obvious limitations in appreciating the government’s woes. But I have average intelligence to realise its dishonesty, misinformation and inconsistency. It is a myth that the government does not control the oil prices. Had it been otherwise, why was the price not hiked when Parliament was in session and still earlier when some states were poll-bound? The price was hiked just one day after the conclusion of the budget session of Parliament. Ironically, this was a day when international prices of oil had come down considerably, following the recent news that Iran, a major producer of crude oil and International Atomic Energy Agency (IAEA) were inching towards an agreement (It may be noted that international prices of oil are often the result of speculations, which, in turn, are determined by the political and security assessments of the leading oil-producing as well as oil-consuming countries) over the former’s suspicious nuclear course!

The timing makes it obvious that the hike has political overtones, something that also explains why the government is hesitating to hike the prices of diesel, kerosene and gas, the commodities whose under-pricing is the real trouble for the oil PSUs. Petrol is always the convenient target because the government-nurtured myth is that it is used by the “Rich”. But the truth is that the real rich mostly use the diesel-run cars and fancy SUVs, something a salaried middle-class man like me cannot dream of owning.

Now let us come to the economics-side of the issue. Here, I am going to rely on the statistics provided by one brilliant Muthuraman of “Centre Right India”. He debunks each of the arguments provided by the government and oil PSUs for the price-hike. To begin with, “the Indian basket of crude oil”, which is determined for a negotiated period (Oil companies do not buy on a retail and day-to-day basis) is at about US$100 today (NYMEX is at US$ 90.32, Brent is at US$ 107.4 – Source: and Indian basket is usually at 5-7 per cent discount to Brent). In fact, crude oil is cheaper today than it was a few months ago when its average price was US$ 120 per barrel. Assuming that we buy at today’s prices, at today’s exchange of Rs 56 per USD (the worst ever!), this works out to Rs 5600 per barrel, which is still 6 per cent cheaper than the highest price of Rs 5900 recorded in August 2008. Add to this another Rs 672 (equivalent to US$ 12 as per standard international norm) for other costs involved in converting the crude to petrol such as transport and refining per barrel. Altogether it comes to Rs 6272.

As one barrel of crude produces about 150 liters of petrol, at today’s price one can argue that one litre of petrol costs our oil companies little less than Rs 42. But how much are we being asked to pay? It is Rs 77-81 per litre, depending on cities. At least that is what this morning’s newspapers say. In other words, we are paying an additional Rs 35-40 per litre as taxes at different levels under various heads—Basic Excise Duty, Additional Duty, Special Additional Duty, Cess, Additional Cess and lastly, the exorbitant State Sales Tax that the governments, both central and state, extract. In fact, India must be one of the rarest countries where the total taxes on each litre of petrol amounts to a whopping 83 per cent on the basic price!

To put it differently, if the petrol is expensive to the consumers, it is not because it is costlier internationally but because the government is looting us through indirect taxes. In fact, it can be similarly argued that the government is not subsidizing the diesel since its production cost to our oil PSUs at today’s price will be the same Rs 42, the rate that the consumers are paying. The oil PSUs are incurring losses precisely because out of this Rs 42 per litre, the government is taking about Rs 35 and 40 as taxes! The diesel subsidy is thus a huge myth.

Muthurman explodes the theory of “sharp depreciation of Rupee” as another contributing factor behind the hike. As he says, “The depreciation of rupee, by about 10 per cent in recent months from Rs 51 per USD to Rs 56 per USD has been MORE THAN OFFSET by the almost 20 per cent decline in the global crude oil prices from USD 120 per barrel to USD 100 per barrel. Moreover, the sharp depreciation in the exchange rate is, in all probabilities, an over-reaction of the market to the global turmoil and it can be reasonably expected that RBI would intervene to soothe the nerves of the market which will have a sobering effect on the rupee. So, the rupee depreciation is NOT a justifiable reason for hiking petrol price today!”

Coming back to the theory of oil PSUs are incurring huge losses “ by subsidizing oil”, few additional points are worth pondering over. First, when they (along with the central government) talk of procuring “highly priced” crude from international market, they should mention that India also produces crude and gas domestically (Assam, Bay of Bengal Basin and Bomaby High, to cite few). What is the quantum of our domestic production and why should it not bring down the overall oil prices, given the fact that we produce them, not buy? One is told that our domestic production accounts for nearly 25 per cent of our oil needs. And most of these are owned by the government PSUs like ONGC and Oil India. Private company Reliance that produces oil/gas sells a part of its produce to the government PSUs at “international prices” and exports the rest directly. The point here is that when Indian consumers need the oil most, why should the domestic production be allowed to be exported and why should they be priced at the same rate that we buy oil from international markets? And why is not the government exploring fresh source of oil both within the country and abroad, something the Chinese are doing wonderfully? What has happened to our explorations in Africa and Siberia?

Secondly, how efficient are our oil PSUs? Since they refine most of the crude oil that we import and produce domestically, why cannot be the cost of refining , given our cheaper labour and cheaper infrastructure costs, lower than what we see in the Western refineries (roughly US $ 10 per barrel of crude)? Why are they not setting up more refineries and augmenting the capacity? And here, why is the government not promoting the participation of the private sector by ensuring a conducive climate for investments, so that the example of Niko Resources fleeing the Indian oil market is prevented?

Given the present level of the governance in the country, I do not expect any answers to the points and questions raised above. And that leaves me still confused what answer I will give now to my car- dealer. Should I buy a car or not?

By Prakash Nanda

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