An inquiry into why Fuel Prices are on the rise

I have wanted to write this particular blog entry for a long time. I believe the date to be 12th Jan 2008. It all started when a friend and colleague forwarded a chain mail. Chain mails are sent by people you know and thought were sensible. Most chain mails are relatively harmless as they ask you to send money or send postcards to fictitious kids with terminal illnesses. They are easily ignored. But this one exhorts the recipients to mobilise for action, so it merits a little more attention.

I do not comment without studying the entire picture, and it took me time to analyze current trends, consider past data, read on the subject and reach my own judgement. The chain mail I received from my friend goes as follows:

****** Hi everybody,
Petrol in Pakistan Rs 17 per litre. Malaysia Rs 18 per litre. In India it's 51 per litre
--------------
REMEMBER: JANUARY 24, 2008.... NO Petrol Day...! (First time, if my memory is sharp, it was 22nd September 2006).
Please "Think Of It ...............********

I guess all of you who would have received this forward. If not, please let me know as I still have a copy of the same.

People are angered by the fact that petrol prices in India are higher than those in Pakistan and Malaysia. The e-mail asserts that this can’t be simply because of crude oil prices. The villains, according to the email, are “the oil companies” who are presumably fleecing the Indian people. So it calls on everyone (in capital letters to compound the irritation) to boycott the petrol pumps on a given day and make the companies lose 4.6 billion dollars in one day.

I guess who ever wrote the email is mad and very mixed up. We should remember that Malaysia is an oil producing country. Pakistan has the use of its own natural gas in addition to the oil that it imports (and that the Saudis subsidised until recently). India heavily relies on oil imports, which means that rising prices of crude oil have a much sharper impact on India than in countries that rely less on imports.

Another colleague of mine wrote in reply to the email forwarded by my friend, which goes as below:

"I don't agree to this.
Even those who agree this would either dump enough of petrol on the day before or will buy extra petrol on the following day. Oil companies will get their fruits anyways.

The bitter truth is we are highly addicted to automobiles and comfortness. Anybody who owns a bike is not ready for a 5-10 minute walk, even to a nearby grocery shop or a friend's house. All want to spring on bikes and reach there burning petrol. Oil companies understand our demand and grow greedy to put hefty prices on our heads. They are utilizing our laziness and earning money out of it. Everyone of us are feeding these oil companies, who in return stamp on our head.

Our demand on petrol should decline. Not lasting for a few hours but forever. It should panic the oil companies to throw their greed on making hefty profits out of us and to reduce the prices down.

I wonder why the Government never regulate this and keep on increasing the prices in favour to the oil companies.

So, no petrol day is not going to bring any changes. However, I appreciate the idea behind this. But please think practically and work on ideas that will make a permanant fix. The idea is simple and is in front of our eyes. Let us reduce our demand on Petrol. "

Perhaps, my friend should have given more thought on the cross subsidy system that is effected by the Govt of India. If he has considered those aspects which many of us tend to ignore, then his comments would have emerged as an authentic one. I wish, he would research the subject before commenting on it, in future."

Here's what I got to say:

Here are a couple of reasons why petrol prices are higher — India’s petroleum industry is not fully open to competition and its government subsidises diesel, farmers, railway passengers and others.

And here’s something that may surprise the author of the email — petrol retailers make better profit margins when prices are falling gently than when they are rising. In any case, boycotting the pumps on just one day is unlikely to be very effective. People will just buy extra petrol on the previous day.

The crude oil prices have touched $100 per barrel - a psychological barrier and a statistical inanity. India imports about 76 per cent of its crude oil requirements which amounts to an oil import bill of around $50 billion every year.

According to information available on the net, India’s crude oil import bill rose by 3.48% in rupee terms and 16.67% in dollar terms during the first half of the current fiscal year. The appreciation in rupee value by 12.3% this year, the most since at least 1974, has helped partially offset the sharp rise in global oil prices. As per the Government, every one rupee appreciation in the exchange rate of Indian rupee against US dollar will help reduction in the net oil import bill by around Rs 3950 crore. It should help that the rupee is forecast to advance 3.4 percent next year to 38 per dollar by the end of December, according to the median estimate of 22 strategists surveyed by Bloomberg News.

The gross under-recoveries in 2006-07 by the three oil marketing companies - IOC, BPC and HPC - were Rs 28584 crore for kerosene and LPG, and Rs 20803 crore for petrol and diesel. The estimated under recoveries by oil marketing companies during April- September 2007 have been Rs13814 crores on kerosene and LPG, and Rs 12549 crore on petrol and diesel. If current price trends hold, the under-recoveries to the marketing companies are estimated to be around Rs 70,000 crore this financial year — around o.75% of India’s GDP. This has to be shared between the three marketing companies, the upstream companies - ONGC, Oil India and GAIL - and the government. The upstream oil companies have already contributed trillions to partially compensate these under-recoveries by the oil marketing companies. The contribution by the upstream companies in 2006-07 was Rs 20507 crore and is likely to rise by another 5000 crores in the subsequent years.

As per the government policy of 2003, the subsidy component by the government has remained constant since 2004-05 at Rs 22.58 per LPG cylinder and Rs 0.82 per litre of kerosene. The balance subsidy is provided by the marketing companies from their own pockets.

In 2006-07, the government issued oil bonds worth Rs 24,121 crore to marketing companies for the four products, while it had issued oil bonds worth Rs.11,500 crore in 2005-06 for losses in marketing LPG and kerosene. The government has decided to issue bonds worth Rs 23,457 crores this year, which is not likely to meet the estimated deficits of the marketing companies. If additional bonds are not issued by the government this year, the deficit can only be met by increasing the domestic prices of the products.

Domestic pricing continues to be a politically sensitive topic, with a broad consensus across the political spectrum to stall any upward revision of prices. There is a Group of ministers, chaired by Pranab Mukherjee, to suggest an alternative model for pricing of domestic products.

As with the Indo-US nuclear deal, the left and the right are both opposed to any hike in prices of domestic petroleum products. The government is also worried about the inflationary impact of higher domestic prices of petroleum products. A cut in the customs duty on the crude oil and in the excise duty in petrol and diesel by the government is likely to keep the prices suppressed for some more time.

The subsidies, whether direct and transparent by the government or indirect as in tax cuts, oil bonds and compensation by government owned upstream companies, are a drain on the resources of the government. The losses to the exchequer can only be reduced when the consumer pays the right price for the product.

We also need to consider the term "Cross - Subsidy". As we are aware, the public transport system in India runs on Diesel. High pricing in Diesel would lead to a further high living cost and a higher rate of inflation. To reduce the burden on the common public, petrol is sold at a higher price to subsidise diesel.

I believe that our dependency on and consumption of fuels would never comedown. Everyday, it would go on the rise. We need to look at other available means of sustainable development.

76% of our oil is imported; this was the case with Brazil, whose oil imports have come down to a mere 15%. What did they do? Alternate fuels.. Ethanol.. Our auto industry is expanding; this means more requirement and added pressure for oil imports. By Asking the auto giants to provide flex fuels and manufacture vehicles that can run on ethanol, the Govt can cut costs. This could provide better income to farmers. Biodiesel is also an other alternative..