Oil & Gas: Who should bear the cost of oil price increase?

The petroleum minister Mani Shankar Aiyar has said the Government will not be revising the price of petrol and diesel during the current fortnight. OPEC had yesterday agreed to increase the quota of production by another 2 million barrels per day. But that did not allay the fears in the International oil markets. The price of the crude shot up to $42, because of terror premium.

There was a discussion in NDTV, involving Nilotpal Basu of CPI (M) and RK Pachauri, Director General of TERI. Pachauri was of the opinion that the oil companies in India are already too late and should be revising the rates upward. The estimated "loss" to the oil distribution companies is about 2000 crores per fortnight, it seems.

However Nilotpal Basu had an extremely valid point. He said the cost of crude and processing came together to only 20% of the sale price, and the remaining 80% was on Government taxes, an argument not challenged by Pachauri, so I am assuming must be correct. Basu's argument was why any increase in crude cost be borne by public, when in the administered pricing mechanism, the oil companies have made profits at various other points. Also he was for rationalising the tax structure.

When the subsidy given to LPG also came up for discussion, Basu was again forceful in explainaing that the Government charges an atrocious 80% tax and then offers a bit of that back as subsidy and claims there is this huge subsidy. Basu's argument is that the price of petrol, diesel and gas shouldn't be this high. Pachauri weakly talked about how the subsidy or non-increase of oil price does not help the rural folks since oil and gas is used only by those in the cities and towns.

Pachauri did talk about energy security - the need to look for sustainable energy resources and not be held ransom by International oil prices.

I entirely agree with Basu's argument. The main beneficiary of random taxation on oil is the Government. Not the oil companies or people. If you look the world over, Indian oil prices (end user) are way over that found in other established western countries. While the taxes may have been levied to discourage wasteful use, I do not think it has helped the economy. [For comparison, a gallon of gasoline in USA costs around $2.1 - or 3.78 litres of petrol = Rs. 90, cost per litre = Rs. 23. In India, cost per litre of petrol is about Rs. 36]

What is the way forward?

To start with the Government should rationalise the taxes. The Oil Companies should then be allowed to set their own prices but governed by a regulator. This way, politicians will not be allowed to decide whether the price should be kept depressed during elections etc. The government should also not decide on who should carry how much burden. ONGC and GAIL have been asked to carry some of the costs, while HPCL, BPCL and IOC are carrying the rest. If private compnies enter the purchase, refining and distribution business, this will have to go.