The Hindu Business Line : China takes cue from India on petro-products

The impact of China’s recent petro-product price hike on its inflation will be of the same order as that in India. Nevertheless, the fact that China has done what India has shows that it is reasonable to restrain consumption of petro-products — more so than to be appealing to the sentiments of OPEC countries for restraint on price increases, says S. VENKITARAMANAN.

Early in June 2008, the Indian public woke up to realise that the Government had hiked energy prices. The increase in prices of petrol and diesel was of the order of 10 per cent Kerosene was, however, spared, but LPG had a similar increase.

Obviously, the reason was a rise in crude oil prices to a record level of more than $135 per barrel. There was no excuse for Government to continue the regime of low energy prices and asking oil marketing companies to bear the difference as before.

This was leading to a serious situation in which the oil refiners were not keen on producing enough petro-products because every additional litre they sold resulted in a cash loss to them. The oil marketing companies prevailed on the Government to realise that its populist policies would lead to a ‘stock out’ at the petrol and diesel pumps all over the country.

These were reviewed in these columns to the contrarian stand of one of the political parties, which had run the Government before the UPA came to power.

In fact, it was their Government (NDA), which had introduced the economically sensible policy of dismantling the Administered Price Mechanism for petro-products.

As a result of this, starting from 2002, that Government adopted a policy of transmitting increase in international crude prices to the consumers from time to time. It was the initial brave start of reform. Soon, that Government recognised the need for administrative intervention and prevailed on oil marketing companies not to continue the policy of transmitting the international price increases.

We are familiar with the protests of various allies of UPA, particularly the Leftists led by CPI (M), to the petro-products price increases. They had argued that the difference in prices should be borne by tax concessions or, in effect, subsidies from the fisc. The Government has done this too to some extent. But there is a limit beyond which it is not possible.

Following India’s lead

Now, the news has come that the Chinese People’s Republic has followed the Indian lead and increased their energy prices for domestic consumers. The Wall Street Journal of June 20-22, 2008, has pointed out that Beijing has raised its petro-product prices consequent on the international price of crude going above $135 per barrel.

China last raised domestic fuel prices by 10 per cent in November 2007 when the international price crude was $90 per barrel.

The new increases will push the base price for petrol (gasoline) up by 17 per cent and for diesel 18 per cent. (This compares with India’s lower 10 to 11 per cent.)

The National Development and Reform Commission has said that petrol price will rise to $3.5 per gallon from $2.8 while diesel will move to $3.5 per gallon from $2.45, the biggest increase in the last four years! Electricity charges were also to be increased.

All this shows that the Chinese political masters are fully aware of the economics of petroleum products pricing — cheapening of petro-products increases demand and that too to an unsustainable level. International pressures have also been mounting on China to reduce its subsidies on oil and petro-products prices.

In fact, leading Senators of the US focused on the fact that Beijing was increasing the demand for petroleum products by keeping its prices low.

China was on the verge of being the main object of blame from the US for the high prices of crude, even replacing the Saudi. China watchers in the US point out that people in Washington complain about price control on petro-products as contributing to high Chinese demand.

Fifteen Democrat Senators sent a letter about two weeks ago, to officials in President Bush’s office blaming Chinese price control for the world’s oil price inflation and urged the Administration to press Beijing on the issue.

The signatories included the Presidential candidate Ms Hillary Clinton. While Chinese price increases are economically justified, they have come on the heels of political pressure from the developed countries, including the US. That cannot be said of India’s decision.

Impact of Chinese move

It would be interesting to watch what the consequences of the Chinese sharp increase in petro-products prices will mean to its exports, inflation, and the general level of consumption of petroleum products. While China is, no doubt, a large economy, it is at present consuming only about 1 per cent of the world’s demand for oil.

The reduction in demand as a result of Chinese petro-products price increase cannot be that significant. But, all the same, China has done what it considers necessary to control consumption of petro-products in China.

The impact on China’s inflation will be of the same order as that in India. China’s inflation was ranging at about 8.5 per cent in May 2008, a bit higher than India’s level. It would be quite reasonable to expect that China hits a double-digit inflation figure as a result of its latest action on petro-products price increase.

Consistency, said a wit, is the virtue of small minds. Inconsistency is perhaps to be expected on the part of political parties that face diverse problems at any time.

But China’s price rise decision should come as an unintended boost for the advocates of the UPA’s Congress wing, which has been trying to defend the Prime Minister and the Finance Minister for their decision on petroleum products.

The fact that China has done what India has shows that it is reasonable to restrain consumption of petro-products — more so than to be appealing to the sentiments of OPEC countries for restraint on price increase.

Self-interest has always been at the top of the agenda for all countries of the world and it was a humbling spectacle to see the Finance Minister of India pleading with the oligarchs of OPEC for compassionate increases in oil production, keeping in view the needs of the developing nations.

Surely, greed is not a dirty word in the political economy of the world and emotional approaches for unprofitable actions are not known to succeed. That the Jeddah Conference ended as it did, with a negative decision on our request for increase in OPEC production, was inevitable.

Policy changes, the real answer

The real answer to the crude price rises of the present cannot be confined to market-based consumer price increases. It demands Government-directed policy changes, which will increase efficiency of energy utilisation, both in respect of industry and transport.

In particular, transport requires special attention as we are mistakenly encouraging a policy of commerce dependent on road transport instead of on rail. Rail transport is far more efficient than road in the use of petroleum products.

Similarly, our policy of subsidisation of kerosene requires a rethinking because it leads to leakages in utilisation with diesel.

The answer to the kerosene problem may lie in extensive rural electrification and supply of power at reasonable rates to the rural poor. It is only the implementation of such policies that will decrease energy consumption in the country.

Reduction of subsidies and increase of prices may have some effect. But the consumption of petroleum products is relatively price-elastic in certain cases. Long-term policy changes like those indicated above will have to receive the attention of Governments of all developing countries.

The developed countries reacted with similar responses in the crisis following the first OPEC increase in 1972-73 and were able to increase efficiency of energy use.

It is time that in this respect India follows the example set by the developed countries while responding to the first OPEC crisis.

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