The Hindu Business Line : Fuelling reform

The bottom appears to have fallen off crude oil prices. Even the announcement of a hefty 4.2 million barrels a day cut in output by the Organisation of Petroleum Exporting Countries (OPEC) has not proved enough to halt the slide in the price of the commodity, which now trades at around $40 a barrel. It has been a stunning fall from the high of $147 barely five months ago and, if experts are to be believed, we are not done yet. This is supposed to be peak season for oil prices as the Western hemisphere heads into winter and energy demand rises. Yet, if prices are tumbling, it is only a reflection of the state of the global economy and falling demand. Of course, OPEC’s strategy of choking supply has proved ineffective; nobody believes its members will comply with the reduced production quotas.

India, of course, is not complaining. With a dependence on imported oil for three-fourths of its demand, the falling prices are obviously welcome, especially in these difficult times. Retail fuel prices have already been cut once in the last fortnight and the Government has hinted at another cut soon. That is only fair given that domestic fuel prices are still high in relation to global levels. The argument that prices were not increased enough and in time during the upward march of crude oil and hence the cuts now should also be moderated does not wash. These are extraordinary times and the economy needs every stimulus that can be imparted. What better than a cut in fuel prices?

Be that as it may, this may be the best time for the Government to let loose the much needed reforms in the oil sector. An opportunity such as this to push through reforms almost painlessly does not come by often. The oil companies should be granted freedom to price all fuels, including cooking gas and kerosene. Again, the subsidy on the last two products needs to be reviewed seriously. There is no reason why cooking gas, the fuel of the middle-class, needs a subsidy. While there is merit in the argument that kerosene needs to be subsidised, the government should look at alternative, more efficient ways of delivering the subsidy. The smart card mechanism, suggested by the Chaturvedi Committee last August, is a workable one. At a speech in Chennai on Friday, Dr Raghuram Rajan, the Economic Adviser to the Prime Minister, echoed similar thoughts. Is that reflective of thinking at the highest levels in Government now? One hopes that is the case indeed because it is only a matter of time before oil prices rise again, and when that happens, there ought to be sufficient competition among the oil companies to provide the lowest prices for consumers. The Government does not have to wade into the oil pricing mess again.