Brent at under $100 was the news - it is refreshing to see falling oil prices, or is it really? Since these prices have direct impact on the government finances, industrial output and obviously, our day-to-day life, it would be nice to see crude rates falling all the way, or so we hope. Unfortunately, we cannot predict these prices, being so volatile.
People have come to believe that as international oil prices rise, the government will eventually increase all related prices, viz. petrol, diesel, LPG and the like. But is this the most rational thing to do?
Let us work out the economics. As oil prices go up, oil-refining and marketing companies will bear higher production costs, which they will seek to transfer to end users, industries and the common man. However, the regulation will not let this happen in order to protect the common man from the brunt. In doing so, it subsidizes these prices for public consumption and promises to compensate the marketing companies, i.e. through combination of oil bonds (are they really?) and subsidies from oil-upstream companies (we don't know who has to compensate the oil-upstream).
As we shall see, let's say, petrol prices need not be as high as we pay for it. Let us say, the crude price is Rs.4,800 per barrel (approx 160 litres). This translates to Rs.30 per litre of import cost; add to this refining costs of, say, Rs.7 per litre and transportation and dealer's commission of, say, Rs.7 per litre. The total cost per litre should then approximate to Rs.44. Now, we wonder why the headlines: petrol to cost Rs.78 in Mumbai, Rs.80 in Bangaluru.....It is because of the taxes that the central (excise and customs) and state (sales) governments levy.
As a result, nearly 50% of the pump cost goes to the government in the form of different taxes. It is another thing that the dealer (shop owner) gets a paltry 1-2% of the pump price as his earning.
In general, the government owns, a large majority controlling interest in both oil-refining and marketing and oil-upstream companies. There could be a nullifying effect or even a profitable situation here, at least for the government: the much profitable higher taxes, lower prices (under-recoveries), oil bonds and oil subsidies.
We do not know the rationale behind first to levy taxes and increase prices on petrol; there is tax on diesel as well, and then to provide subsidies on diesel, kerosine and LPG. It should rather be kept separate. When we compare the tax rates on petrol and diesel in India with that of other countries the results are very interesting.
Subsidizing domestic fuel is both a social and (more of) a political matter. So it can be a bit touchy. We can understand regulating domestic consumption oil, such as, kerosene and LPG in order to subsidize those who cannot afford (a large number lives under poverty). It is another matter that this subsidy is being enjoyed by the rich as well which should be dealtwith separately. But for the moment why should commercial consumption and consumption for comfort be regulated?
Petrol prices in India are already one of the highest compared to some developed countries (let's not even compare with other emerging markets). We donot know why the people of the country who have a much lower per-capita income be subjected to this ordeal.
Petrol has been deregulated, but only on paper. We are yet to see that in action. It is time that we let prices of petrol and diesel be market-driven rather than policy-driven.
Oil-upstream companies should be allowed to do what these are supposed to do - find fuel. Earnings of these ventures should be invested in the business for maintenance and acquisition rather than filling the subsidy kitty for subsidies are not operating expenses. This would help increase oil assets of the country resulting in lower import bill. A large part of dividend payouts go the government anyway.
Pricing of domestic fuel and its under-recovery should be worked out on a more systematic manner; certainly there should be ways to bring them to a more reasonable and rational level.
This should surely result in lower, rather than higher, oil prices in the market; no under-recoveries for the oil-marketing or subsidy-holes for the oil-upstream. The government should look for something else to compensate for the lower taxes revenue.
People have come to believe that as international oil prices rise, the government will eventually increase all related prices, viz. petrol, diesel, LPG and the like. But is this the most rational thing to do?
Let us work out the economics. As oil prices go up, oil-refining and marketing companies will bear higher production costs, which they will seek to transfer to end users, industries and the common man. However, the regulation will not let this happen in order to protect the common man from the brunt. In doing so, it subsidizes these prices for public consumption and promises to compensate the marketing companies, i.e. through combination of oil bonds (are they really?) and subsidies from oil-upstream companies (we don't know who has to compensate the oil-upstream).
As we shall see, let's say, petrol prices need not be as high as we pay for it. Let us say, the crude price is Rs.4,800 per barrel (approx 160 litres). This translates to Rs.30 per litre of import cost; add to this refining costs of, say, Rs.7 per litre and transportation and dealer's commission of, say, Rs.7 per litre. The total cost per litre should then approximate to Rs.44. Now, we wonder why the headlines: petrol to cost Rs.78 in Mumbai, Rs.80 in Bangaluru.....It is because of the taxes that the central (excise and customs) and state (sales) governments levy.
As a result, nearly 50% of the pump cost goes to the government in the form of different taxes. It is another thing that the dealer (shop owner) gets a paltry 1-2% of the pump price as his earning.
In general, the government owns, a large majority controlling interest in both oil-refining and marketing and oil-upstream companies. There could be a nullifying effect or even a profitable situation here, at least for the government: the much profitable higher taxes, lower prices (under-recoveries), oil bonds and oil subsidies.
We do not know the rationale behind first to levy taxes and increase prices on petrol; there is tax on diesel as well, and then to provide subsidies on diesel, kerosine and LPG. It should rather be kept separate. When we compare the tax rates on petrol and diesel in India with that of other countries the results are very interesting.
Subsidizing domestic fuel is both a social and (more of) a political matter. So it can be a bit touchy. We can understand regulating domestic consumption oil, such as, kerosene and LPG in order to subsidize those who cannot afford (a large number lives under poverty). It is another matter that this subsidy is being enjoyed by the rich as well which should be dealtwith separately. But for the moment why should commercial consumption and consumption for comfort be regulated?
Petrol prices in India are already one of the highest compared to some developed countries (let's not even compare with other emerging markets). We donot know why the people of the country who have a much lower per-capita income be subjected to this ordeal.
Petrol has been deregulated, but only on paper. We are yet to see that in action. It is time that we let prices of petrol and diesel be market-driven rather than policy-driven.
Oil-upstream companies should be allowed to do what these are supposed to do - find fuel. Earnings of these ventures should be invested in the business for maintenance and acquisition rather than filling the subsidy kitty for subsidies are not operating expenses. This would help increase oil assets of the country resulting in lower import bill. A large part of dividend payouts go the government anyway.
Pricing of domestic fuel and its under-recovery should be worked out on a more systematic manner; certainly there should be ways to bring them to a more reasonable and rational level.
This should surely result in lower, rather than higher, oil prices in the market; no under-recoveries for the oil-marketing or subsidy-holes for the oil-upstream. The government should look for something else to compensate for the lower taxes revenue.
