The fuel cash cow

Topics Fuel prices | Crude Oil | Oil Prices

Fuel prices were raised again by the oil-marketing companies (OMCs) on Monday. This makes nine price increases in succession since the daily price revision system was re-introduced earlier this month after a gap of over 80 days. During that period, two major changes occurred: First, the global price of crude oil crashed on weak demand, and although it has since recovered to around $40 a barrel, it is still down almost 40 per cent year-on-year. The second change was the increase in fuel taxes by the government. Duties and various types of cess were increased by over Rs 10 per litre. However, unlike increases in their value-added taxes on fuel by states like Maharashtra and Tamil Nadu, these were not passed on to the consumer but were essentially absorbed by the OMCs. The significantly higher crude oil prices now have therefore eroded their margins, which explains the upward pressure on prices at the pump being displayed by the series of increases.

The basic logic of higher fuel prices need not be questioned. For reasons to do with external vulnerability, the battle against climate change as also government revenue, there is every reason for India to have high fuel taxes. The government’s broad willingness to risk public anger to keep prices high and to depend on fuel revenue to fund other commitments is welcome. The further increase in taxes will bring in between Rs 1.2 trillion and Rs 1.7 trillion to an exchequer that is reeling from the effects of the pandemic and the underperformance of goods and services tax. That said, some questions should and must be asked about processes. For one, the cartel-like behaviour being exhibited by the OMCs is quite unacceptable. If the public-sector OMCs are to be treated as proper commercial entities, and if the prices they charge are truly deregulated and free from political interference, then it would have been the case that they raised prices at different levels and at different times. That is how the market dynamics would play themselves out.

Questions about transparency in pricing exist up and down the supply chain. Oil and Natural Gas Corporation of India (ONGC), for example, has asked that the government provide it with a price assurance of $45 a barrel (as well as a waiver on certain payments to the government). This might be useful for ONGC, but it makes no economic sense. There needs to be a freer market for fuel in the country. Certainly, some reforms are possible. For example, instead of an import-parity price, there could be a trade-parity price, since India is an exporter of refined fuel as well as an importer of crude oil. Retailers should be allowed to buy oil from multiple refineries even for a single outlet. Transparent refinery pricing would allow retailers to pick and choose, and ensure that market signals are transmitted to the various companies in the supply chain. Essentially, public-sector refineries must compete with the private sector and with one another, and the same logic must apply to the upstream companies. India will then have a competitive energy sector — one which the government will be able to tax transparently and remuneratively through its fuel taxes.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel