Deregulation of Oil prices: Yet another Endeavor!

The rising prices of petrol and diesel have always been a concern for consumers, oil marketing companies as well as the Ministry of Petroleum & Natural Gas (MOP&NG). To politicians, these prices may only be a matter of gaining or losing reputation, however for the consumer a price hike means having to revamp his entire household budget. The state-owned oil marketing companies (OMCs) are the worst hit; their bottomlines have been severely dented as a repercussion of selling the commodity at government regulated prices. The centre, therefore, is considering options of bringing in much needed reforms in the oil sector by executing partial deregulation of the oil prices.

In 2002, a similar proposal was being discussed upon, wherein, an attempt was made to dismantle the administered pricing mechanism in the oil sector. However, the reform collapsed in 2004 as a result of the government’s intervention to check the activities of the OMCs – who were diverting the burden of the surging crude prices to the consumers.
This time around, MOP&NG has prepared a draft Cabinet note on deregulating the price of petrol and diesel. According to the proposal, oil marketing public sector undertakings (PSU OMCs) like Indian Oil Corporation, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited will be given the leeway to fix the rates of petrol and diesel till the price of crude stays below USD 75 per barrel. Once the price goes overboard, the government would intervene to protect the consumer’s interest. The Ministry has already secured support from Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, who agrees to the proposal of linking the price of these two products to the price of crude oil in the international market.

This reform becomes very imperative for the PSU OMCs, which are bearing losses to the tune of USD 28 million per day on sale of petrol, diesel, LPG (liquefied petroleum gas) and kerosene. Currently, the government is offsetting the losses being incurred by these Oil PSUs through a three-pronged complex compensation mechanism. More than one-third of the loss is being compensated through the sale of oil bonds to oil marketing public sector undertakings, while another one-third is met through the sale of crude oil by state-owned oil and gas explorers like the Oil and Natural Gas Corporation and GAIL India Ltd. at a discounted rate to state-owned oil retailers. The remaining loss is covered by the periodic rise in retail prices of petroleum products as allowed by the government.

The bleeding has to stop not only from the Public sector end, but also from the Private sector end. For long, private companies like Reliance Industries and Essar Oil have been urging the government to provide them with a level-playing field as far as the prices are concerned. Since there is a lack of subsidy provided to them, the two companies have closed down their retail outlets.

Analysing the current scenario where the crude price is hovering around USD 50-60 per barrel, it is the right time to bring in partial deregulation. If the reform gets implemented, the price of the petrol will surge by USD 0.04 per litre and the price of the diesel will slump by USD 0.006 per litre. With the same government being re-elected, the oil sector can hope for some sort of deregulations which increases neither the financial burden of oil marketing companies nor the pressure on the poorer sections of the society.