The Hindu Business Line : Curiously unenergetic

INTERNATIONAL OIL PRICES are on the boil once again with the benchmark Brent crude testing the $57 per barrel mark. There is now talk of prices touching $100. This ought to have set alarm bells ringing, but the Government appears utterly unconcerned. The prevailing domestic prices of transportation fuels — petrol and diesel — were set on the basis of a $39 per barrel rate; the basket of crude oils India imports now costs $52-53 per barrel. Obviously, the Government cannot put off for long the hard decision of raising retail prices. Yet, even that will be only a short-term solution. With the long-term outlook on global oil prices being bullish, needed is a comprehensive re-look at policies for the energy sector as a whole with a long-term perspective.

The Government has to take a holistic view on the sector as no single issue can be looked at in isolation. For instance, price management of petroleum products has to include a review of the duty structures — Customs, excise and sales tax — along with the subsidy extended on cooking gas and kerosene. Indeed, the issue of subsidy itself needs a re-look especially on the aspect of its delivery. It is well known that subsidised kerosene is used as a diesel adulterant, and subsidised cooking gas ends up being used by commercial establishments, such as hotels and restaurants. The tax structure has to be calibrated such that it does not add to the burden of the consumer when the basic price increases, as is the case now.

The Government also needs to foster competition in the oil sector, which remains a reforms laggard. Needed is a replication of the bold moves made in the telecom sector that were directly responsible for the falling call tariffs. Ironically, in the oil sector, things have got messier in the last three years after the dismantling of the Administered Price Mechanism than they were during the control era. In the early days of the so-called free market, there was at least a semblance of pricing freedom for the oil companies but now the Government has stopped all such pretence and assumed wholly the responsibility of managing prices. The desire to keep a lid on petroleum product prices appears inexplicable when prices of other daily necessities such as vegetables and cereals rise and fall to market tunes.

A policy that mutes the market price signal does not help demand management as consumers are not persuaded to modify their consumption. On the other hand, by introducing pricing freedom and vibrant competition, the government will force the oil companies to weed out inefficiencies that now are passed on to consumers through higher prices. However, the Government would have to link such freedom with the appointment of a regulator for the sector, something that has been in the works for more than three years now. With the inexorable rise in oil prices, there is a crying need for a comprehensive overhaul of government policy towards the sector. Merely adding production acreages abroad cannot guarantee energy security; prudent policies on pricing, usage and competition are important too.

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