Slippage in oil

The recent surge in global crude oil prices does call for a proactive policy response from the new government, and revision of retail prices of key petro-goods without dithering and delay. Now, it is quite likely oil prices would remain range-bound, with overall global demand weak.

But given the hugely stretched government finances and a massive fiscal deficit, the Centre must eschew soft options like non-revision of retail oil prices and further issuance of oil bonds. That would be plain non-reform, and worse. It would shore up populism, boost reckless consumption of the main petro-products and thoroughly misallocate resources.

Note that crude prices have risen almost 100% since December, to touch $60 a barrel. And back-to-back, the oil marketing companies are now reportedly incurring losses on the sale of petrol (Rs 1.54 a litre), kerosene (Rs 11.80 a litre) and cooking gas (Rs 88 per cylinder).

The mounting under-recoveries imply open-ended consumption subsidies for the non-poor. That diesel prices, with a margin of Rs 1.09 a litre, remain in positive territory is cold comfort. A rally in crude prices could turn it
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The point is, under-recoveries in the oil sector reportedly added up to over Rs 1 lakh crore last fiscal, and this year there simply isn���t fiscal space to accommodate further giveaways. Instead, the Centre needs to boldly pursue oil sector reforms.

What���s required are competitive, market-determined prices in oil that reflect its scarcity value and imported costs. The effective ring-fencing of retail sales of oil products need to be replaced with proper market design and independent retailers. Finance Commission chairman Vijay Kelkar, in the 1990s, estimated the gains from oil sector reforms at Rs 1 lakh crore.

Given the heightened volumes in oil, the benefits would now be far greater. Actually, the Centre needs to implement an integrated energy policy without further delay. The reform of agricultural power supply (with separate feeder lines and the like) would nip in the bud the seemingly attractive political option of keeping diesel prices unrevised, never mind flaring prices of crude. What���s needed is creative policy design.