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Oil: running out of options

The Union Government might have once again deferred a decision on hiking petroleum product prices but sooner rather than later it will have to confront the vexatious issue of moderating the impact of soaring world crude oil prices. In the middle of the festival season, the Government did not want to take an unpopular decision but it cannot postpone it any longer.

Even though there could be other weighty reasons to defer a decision further — the key Gujarat Assembly elections in December, for instance — recent reports indicate that a formula, involving a ‘modest’ hike in petrol and diesel prices, a reduction in excise duties on transportation fuels and a customs duty cut on imported crude apart from the issue of oil bonds, is being worked out. But whatever the final ingredients of the formula, it will be politically contested and will not satisfy everyone in an economic sense.

Domestic petroleum pricing is a juggling act. The interests of refiners, marketing companies, the Government which collects a large proportion of its indirect tax revenues from this sector and consumers will have to be balanced. This thankless task is getting more complex by the day. Any decision that the Government takes, like all of its previous decisions, will be ad hoc and its consequences are bound to hurt one or the other of the four parties.

The one area where the Government has no control is the price of oil in the global market. India imports 73 per cent of its oil requirements. Hence, when global oil prices come within a brace of $100 a barrel, there is bound to be plenty of consternation and along with it a feeling of helplessness. There are no permanent solutions: whatever measures that are readily apparent such as conservation, development of alternative fuels, stress on mass transportation and so on are no doubt important but can yield results only over the medium term.

The Government is simultaneously pursuing a strategy of acquiring strategic interests in oil fields in countries such as Nigeria, Sudan and Egypt besides the old Soviet Union countries. That gain will not address the problem of record oil prices today. Besides, there are complex, geo-political factors that count as much, if not more, in these decisions.

Last week there were expectations that crude oil will cross the psychological milestone of $100 a barrel. The only reason why that did not happen is the fact that U.S. oil inventory levels are reportedly higher than what the markets had assumed. But even without that oil prices are at their highest levels ever. The only time they were at these levels was in the early 1980s. Adjustments for inflation are often made in making such comparisons. That is how in the past oil prices, though high in nominal terms, were still below their historic levels. Such arguments will not count anymore.

Explanation of high oil prices has been on familiar lines: insatiable demand from India and China, the onset of winter in the U.S. and Europe leading to a sharper demand for heating oil and a storm in the North Sea disrupting supplies. Geo-political factors such as trouble in the Niger delta and the Turkey-Kurds imbroglio have no doubted aggravated supply problems. Speculative money is once again blamed. Very likely, speculators have had a major role in oil’s climb from $80 to nearly $100 in less than a month. The dollar’s decline against major currencies is another factor. The petroleum trade is invoiced in dollars.

India’s crude basket — the weighted cost of its imports — has climbed to $89.36 a barrel. There are very few options available for the Government as consumer prices can be only marginally touched if at all. Oil marketing companies say they are incurring heavy losses to the tune of Rs. 240 crore a day — selling petrol, diesel, LPG and kerosene at subsidised prices. If there is anything certain about the relief package, it will be the further issuance of oil bonds to these companies to partly compensate them for ‘under recoveries’, the differential between their input costs and controlled selling prices. The relief package by way of bonds may touch Rs. 30,000 crore for the whole year. Oil bonds will naturally have to be redeemed some time at which point the exchequer will bear the whole burden. They merely postpone the problem.

From the point of view of public finance, the issuance of such bonds adds considerable opacity to budget making. According to reliable estimates, over the past three years, these and other bonds such as food bonds and fertilizer subsidies have added up to 2 per cent of the fiscal deficit. Hence fiscal rectitude mandated under the FRBM (Fiscal Responsibility and Budget Management) Act will be difficult to achieve and the vastly improving fiscal situation on top of strong economic performance will come to nought. Despite all these objections, issue of bonds seems to be the only feasible course for now. Raising consumer prices has always been a politically sensitive issue. This time, even if the low wholesale price index inflation rates give some headroom, the Government is unlikely to hike retail prices of both transportation and cooking fuels, except marginally.

The other option is to cut excise duties. That will impact immediately on tax collections and increase the fiscal deficit.

Hence, while some kind of ‘rationalisation’ in taxes is on the cards, the issuance of bonds will be the main item in the Government’s package.

C. R. L. NARASIMHAN

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