Tuesday, November 8, 2011

Petroleum products manufacturing and pricing policy

There cannot be a single person in India who is happy about the latest increase in petrol prices.  Also, it has in its wake brought some shocking views.

A Division Bench of the Kerala High Court chaired by the Acting Chief Justice has made a statement that the oil companies are trying to choke people with a string and that the citizens should launch protests. In my opinion, the duty of Judges is to look at the legality of the matters that come before them and not to exhort people to start agitations. For fear of Contempt of Court I dare not say anything more.  

First of all, let us understand why price hikes become necessary in the petroleum field. The price of the basic raw material continues to be at a high level even though occasionally there is nominal fall. The oil producing countries decide on the output, usually at a rate that is beneficial to them. This is, one should assume, known to most people.

Recently I heard a politician speak on the TV that even though the price of crude fell by $2 per barrel, the UPA increased the petrol prices. I suppose that the fellow, like many of his colleagues, did not study the subject or even if they tried, are incapable of understanding it.

There was another one, an ex-minister telling The Kerala Assembly that from a high of $118 per barrel of oil the prices have been coming down, but the Government of India keeps increasing the price. This man has either forgotten his economics or he was purposely misleading the others.

We pay for the crude in US dollars. Fall in oil price becomes beneficial to us if the rupee-dollar parity remains steady or tilts in our favour. But look at the situation today. Rupee has slipped against the US currency; it is around Rs.50 per USD now. The calculation should be simple.

There are three ways of buying oil – spot buying, futures trading and contractual arrangement. Futures’ trading which is being increasingly applied to most of the commodities is a tricky business which requires a great deal of expertise. Like in all industries, in the petroleum field also, the efficiency in buying raw materials adds to the profit margin and provides the elbow room for price reduction and competition. Many of the important officials in the nationalized organisations are not specially trained in business management.

The NDA and the UPA whenever they were/are in power have been following the policy of subsidizing the prices of petroleum products. Obviously, vote bank politics are behind this. Subsidy expended in one sector, negatively affects the development of some other sector/s. Finally, when the day of reckoning comes, the quantum of price increase required becomes shockingly high.

Three years back I had written a post titled Tackling the oil crisis. One point I failed mentioning then was that the vehicles should be kept in good condition. Anyway, let us have a look at what could be done to handle the situation:

1. Take a look at the crude oil buying procedure and see whether    improvements can be made. There could be a committee of experts to oversee the details. At what prices other major countries are buying oil and their retail prices should be followed and the details should be publicised through the media. Even though the information is in the public domain, it is not easy for a common man to get it.

2. The Central Government should review the customs duty on oil import and see whether it can be lowered.

3. The sales tax charged by the States should be changed from the present ad valorem system to per unit, say per litre basis. Today each increase in petroleum price is a bumper lottery to the States. They get huge unbudgeted revenue from sales tax. Many States run on income from liquor and petrol.

4. A price escalation formulae should be worked out and implemented, say, every quarter. There could be a similar system which shall apply to taxi and auto rickshaw charges.  

But the real answer is none of these. Large scale corruption in the oil companies cannot be ruled out. Right now, reportedly one of them is into real estate. It is spending large amounts to buy land in several places in the country. It seems that Rs.40 crores have been spent in Kerala itself. The idea it seems, is to build holiday homes for employees. If true, it is shocking.

We have seen the damage the Socialistic (non existent?) pattern of society path has done to the country. Nationalisation, license raj, ruining of a world class airline and so on. The nation should be grateful to Narasimha Rao and Manmohan Singh for starting the correction process.

Now Manmohan Singh should take the final step – privatize the oil companies. Let there be competition in the market but ensure that no cartel/monopoly comes into existence. The government’s business is governance, not manufacturing goods from condoms to petrol. The BJP should support the Congress in this endeavour, or start the move themselves. Probably both would like to wait till the forthcoming State Assembly elections are over.

The people are likely to accept and agree to this change in policy if the idea that price reduction may be possible is presented to them properly. The only serious objection, if political interests are avoided, would be from the Communists. Well, for eighty years they have been making a lot of noise about many things but have not achieved anything worthwhile. If some private entrepreneurs make some money while supplying goods to the people at cheaper rates, why should anyone bother?

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Anand Antony said...

Agreed that privatization is the answer, with the proviso "no cartel/monopoly comes into existence", as you have mentioned.
There should be laws restricting the market proportion of any single entity. Otherwise private companies will be as worse as a public monopoly or even worse. Any collusion between the companies on price fixing should be made a serious offense.

Happy Kitten said...

Great to have you back...

But can you explain how our oil companies are never in loss.. in fact, they are the best profit churning companies....

how are they making this profit and is it fair, if they are doing so by making the entire nation pay for it?

We already have private oil companies who are enjoying the plight of the nation... will it make any difference if we add more?

Abraham Tharakan said...

Anand Antony, thanks for the comment. You are right All care should be taken to avoid monopolistic and restrictive trade practices.

Abraham Tharakan said...

Happy Kitten, great to hear from you again.

It is an interesting question that you have come up with. I suppose that the susidy given by the Government makes the difference.

Nebu said...

We have tried with socialism for the past 64 years now for a change let's try Capitalism. If it becomes anti people can't we then go back to mixed like before?

Nebu said...

We tried socialism for the past 64 years and achived the 'Hindu rate of growth. Now for a change let's try Capitalism. If it becomes anti people can't we then go back to mixed like before?