The Hindu Business Line : Petro pricing, beyond politics

WITH THE PROCESS of aligning petroleum product prices to costs becoming so sensitive to the point of even threatening the survival of the government, the Centre's latest decision to allow public sector oil companies some limited freedom on this front, based on a fortnightly review of international price trends, is clearly an attempt at depoliticising it. By clothing what has all along been a political decision with the veneer of routine administrative action, it is hoping to distance itself from any adverse political fallout of a price hike. Also, the flexibility of a fortnightly review would mean that each such hike would be marginal and mute any public protest, even while conferring on the oil companies the prospect of achieving rapid parity with a target price. The Government could even be reasoning that if an odd reduction (in prices) could be thrown in, amid the regular upward correction, public acceptance of the new pricing regime would be even greater. But despite the seeming autonomy, the Government control over pricing could be said to be intact as the characteristic of predominant public ownership of these companies allows it the freedom of back-seat driving.

It would call for some very deft manoeuvring by the Government and the oil companies if the political costs — of antagonising the Left, whose support is so vital to the coalition — are to be balanced with the commercial viability of the oil marketing companies. The arrangement bristles with imponderables. By linking the price revision to a combination of a rolling average of last one year's prices and the immediate three-month prices, the Government is forcing the oil companies to incorporate the effects of softer prices that the international market may have exhibited any time in the last one year. How far this would secure the commercial viability of oil companies in the face of any sustained rising trend of crude prices is difficult to predict. On the other hand, without an institutional arrangement for islanding surpluses from a softer international price regime (such as under the earlier oil pool mechanism), the tendency to delay effecting downward adjustment could lead to cries of windfall profits which can be politically damaging to the Government's `reform-with-a-human-face' credentials. And, of course, frequent revisions in prices is a wonderful opportunity for retailers to make inventory profits; these distributors instantly hike prices but make downward corrections only after exhausting the stocks on hand. That would not make the ordinary consumer feel beholden to the Government for the new pricing regime.

But the implications of the latest decision go beyond mere political posturing. From a situation of securing for the public stable energy prices through administered prices and high taxation, it is venturing into the uncharted territory of leaving it to the vagaries of the market forces. The Government may have officially declared quite some time ago that the era of administered prices for petroleum products is over. A benign international price scenario allowed the Government the luxury of espousing a commitment to market forces while retaining a tight control on product prices. But the rapid rise in crude prices in the last one year or so has put paid to this grand illusion.