The Hindu Business Line : Gassed out

YET ANOTHER CRISIS in the petroleum sector and yet again a short-term solution and the bottomline — no lessons learnt from the entire episode. This time it is a shortage of cooking gas (LPG) ostensibly due to a planned shutdown at Reliance's mega refinery and lower output from a couple of upstream producers. The solution, of import of LPG, is probably the best under the circumstances. But is the government drawing the right long-term lessons from the episode? Unfortunately, the answer is no.

The LPG crisis is one more symptom of a larger ailment in the industry. And that is the issue of government control over pricing of petroleum products and the burden of subsidies thrust on the industry. The current crisis may have been caused by abnormal factors but the fact is that the refining companies have, in their pursuit to rein in costs, drastically reduced inventories of products. Cooking gas inventories are down by half which means that the ability of the industry to react to crises such as the current one caused by a refinery shutdown is limited. Unfortunately, in the current instance, it is the oil companies that will be paying the penalty as they will have to import at high prices, including the spot premium that they have to shell out. Inevitably, the entry of buyers with large orders, such as the current one of about 200,000 tonnes, pushes up spot prices to the detriment of the buyers. And the quantity imported at such high prices will have to be sold at subsidised prices in the domestic market with the difference being borne by the oil marketing companies.

The point is that the oil companies are being driven to desperate measures such as cutting down on inventory in order to stay profitable only because of the government's pricing policy for petroleum products. Where is the incentive for a marketing company to maximise LPG sales when it loses more than Rs 100 per cylinder on every domestic sale? Apart from causing losses to the marketing companies, the artificially low price of cooking gas also encourages diversion of cylinders for use in hotels, restaurants and such other places. The net result is wastage of subsidy on users who are not really the targeted beneficiaries. Not that the government is unaware of these problems. The Petroleum Minister, Mr Mani Shankar Aiyar, while disclosing the decision to resort to imports on Thursday, indicated that the oil companies have been asked to check the diversion of subsidised cylinders for commercial use. But, sadly, the oil companies can do only so much on this front, given the huge price differential between their supplies and market rates. The onus is really on the Government to devise a better system of targeting subsidies at deserving users.

The subsidy policy earlier prevented the private LPG bottling industry from taking off — only a handful of the dozen or more private players who entered the industry a decade ago now survive. The public sector oil companies may not exactly be fighting for survival but there is little doubt that the current policies will cause long-term damage to their health.

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