Eschew populism in oil

Prime minister Manmohan Singh is spot on in eschewing populism in oil. Despite the welcome fall in global crude oil prices, the PM has taken the stand that the downward revision of retail prices of key petro-products should only be considered when the public sector oil companies stop making cash losses.

The fact is that over the past several months the revision of retail prices of petrol and diesel have been thoroughly muted and totally out of sync with the flaring prices of crude. So, never mind that imported oil costs have begun to significantly abate, it does make sense to delay lowering domestic prices so that oilcos can recoup huge under-recoveries and make good outright losses.

Otherwise, cash-strapped oilcos would willy-nilly step up unscheduled borrowings and ��� given the volumes in oil ��� needlessly worsen the already tight liquidity situation. Besides, domestic oil prices do need to factor in international scarcity value so as to deter consumption, boost energy conservation and incentivise the use of non-oil alternatives.

Also, while it is true that the Indian-basket crude price has dropped to $48.57 per barrel ��� down from over $140/bbl in July ��� the rupee has considerably depreciated in the meantime. And given the weak rupee, it may take a while for the margins of oilcos to improve, despite the fall in global crude prices. Which is why there is no need to reduce retail oil prices in a hurry.

As a principle there is no reason why the Cabinet should decide on oil prices time and again. Instead, what is required is long overdue oil sector reforms so as to have competitive prices across the board in the fast-growing oil economy. In tandem, we need proper markets and the opening up of retail oil sales. There is no reason why oil marketing should remain, in effect, a cosy monopoly of oilcos.

We do need to do away with what are essentially monopoly prices for petrol, diesel, etc. Also, such glaring distortions as high, cascading taxes on oil products need to be shelved. Further, the extant system of open-ended subsidies for domestic fuels must end. In parallel, the speedy diffusion of possible alternatives like solar energy do require policy focus.