The Hindu Business Line : Falling oil prices: Grab the opportunity for reform

Falling oil prices present the Government with a great opportunity to push through painless reform. The authorities should piggy-back on a price cut and free petroleum product pricing, says RAGHUVIR SRINIVASAN.

The Government should free pricing for the four major products that are still under its control — petrol, diesel, cooking gas (LPG) and kerosene.

Even as our policymakers grapple with the fallout of the global financial markets crisis on the country, there is at least one reason for them to cheer — the free fall in crude oil prices. Oil is down by more than half from its peak of $147 a barrel in early July.

It is a sign of the times that even a hefty 1.5 million barrels per day cut in production by the Organisation of Petroleum Exporting Countries (OPEC), which accounts for 40 per cent of global output, last week, failed to buoy prices. The price of the benchmark WTI grade actually fell by $2 a barrel, even as the OPEC bosses were discussing the output cut in Vienna.

It is clear that oil prices have acquired a momentum of their own — downward — and there is little that OPEC or other producers can do to hold it steady.

The financial market turmoil is now threatening to spill over into the real economy of the US and European Union countries which together account for more than 30 per cent of world oil demand. Indeed, the UK has already registered its first quarter of negative growth and the Bank of England has signalled that it could be in the start of a recession.

With several Asian economies such as Japan, South Korea and Australia also wobbly, the threat of a global economic slowdown is real. Global oil prices are, therefore, unlikely to rebound in a hurry.

Question of time

A cut in domestic fuel prices is now obviously just a question of time. Or should we say timing? Elections in four major States are due in a month’s time and the government would obviously like to score a few brownie points by cutting fuel prices just ahead of the polling. Public memory is short and therefore the government may want to delay the price cut decision till much closer to the polling dates.

We have already seen the Petroleum Minister, Mr Murli Deora’s teaser in Parliament last week when he cryptically said that prices will be “reviewed” in a week’s time.

There is no doubt that there is some pressure on the government from the oil companies to delay the decision till it becomes clear that oil prices will stay at these levels and they make up for at least some of the under-recovery already sustained. Yet, there is little doubt that a price cut is imminent. The drastic turnaround in the fortunes of crude oil presents our policymakers with an excellent opportunity to clean up the mess in the domestic oil sector. Such opportunities do not come by often and it is a fortuitous turn of events for a sector that faced the threat of being drowned in a sea of subsidies barely two months ago.

Chance for reform

This could be the best time for the government to push through reforms in the oil sector by riding piggy-back on a price cut.

The government should free pricing for the four major products that are still under its control — petrol, diesel, cooking gas (LPG) and kerosene. It should divest its pricing power to the oil companies and allow them to set prices on a periodical basis. It is easier to do this when prices are low and falling as the consumer will not be affected.

To be sure, to suggest such reform may seem inappropriate in the current economic and political environment. In terms of the economy, the country is grappling with the effects of the financial market meltdown while, in a political sense, we are in an equally turbulent phase with State elections announced and general elections probably just round the corner. Now, which government will have the courage to embark on policy reform in such an environment?

Yet, this may be a golden opportunity to settle once and for all the vexed issue of cross-subsidies among petroleum products and their deleterious effect on the oil companies and indeed, the Government itself.

This Government certainly knows how it feels to be in the hot seat when oil prices go up and there is a compelling need to pass on the increase to domestic consumers. It also knows how perilously close it came to bankrupting the major oil companies because of its inability to pass on price increases.

There is no reason whatsoever why any government ought to find itself in such a predicament. Pricing of petroleum products should be left to the oil companies.

The political variable in petroleum product pricing has to be removed from the equation and that can be achieved only if the government ceases to assume responsibility for fixing prices.

Target subsidy efficiently

The reason often touted for the government controlling prices is that the poor man will be affected if fuel prices rise. For below-poverty-line (BPL) consumers using kerosene for cooking, this logic holds good. But, over the years, it has been extended to those using cooking gas — that is, the rising middle-class — as well as petrol and diesel.

There is no reason why cooking gas prices ought to be subsidised, especially because such subsidy causes immense distortions in the market, including misuse by commercial consumers. With LPG prices now falling, the time has probably come to review the subsidy and phase it out over the next two years. The Government should dust out the Report of the High Powered Committee on the Financial Position of Oil Companies headed by former Petroleum Secretary, Mr B. K. Chaturvedi, which sets out a well-thought-out plan for this.

The Report also has a suggestion for the efficient targeting of kerosene subsidy, which is largely misused now to adulterate diesel.

A smart card system that will target the subsidy at deserving users is a more efficient way that will also probably bring down the subsidy bill for the government. The subsidy itself has to be provided for in the Budget and oil companies should not be forced to bear the burden.

Best opportunity

Though oil prices are depressed now, the long-term prognosis is one of expensive oil. Once the global economy rides out the current storm and growth returns to the developed economies, oil prices are bound to bounce back.

When that happens, India, which depends on imports for three out of every four barrels that it consumes, could find itself in a similar situation as the last two years.

Therefore, whichever way one looks at it, this is the best opportunity in a long time for the government to free prices. Soon, it will announce a cut in domestic fuel prices.

Simultaneously, it should free itself of the burden of fixing prices and transfer the responsibility to the oil companies. If current fortunes hold, who knows, the oil companies may even have the chance to further cut prices in the near future.

Given that it will bow out of office shortly, the government does not have to worry too much about political opposition to such reform, which will be blunted anyway by the cut in fuel prices.

The last time such an opportunity presented itself was in 2001-02, when oil prices were even lower than now and Mr Atal Bihari Vajpayee’s NDA government was in power.

That opportunity to free prices was squandered by the Vajpayee government for its own reasons. Dr Manmohan Singh now, thanks to an unexpected albeit dark set of circumstances, has been presented with a similar opportunity. Will he grab it?

blfeedback@thehindu.co.in

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