The slippery slope of soaring oil prices

The turmoil in north Africa and West Asia will render awry the budget arithmetic of finance minister Pranab Mukherjee even if global prices of crude oil stabilise at around $100 per barrel. An increase in the administered price of diesel is expected in the second week of May — which may be accompanied by hikes in the prices of subsidised kerosene and cooking gas. All of which is certain to ensure that inflation will remain high despite government claims to the contrary.

On March 24, Mr Mukherjee expressed concern in the Rajya Sabha about the instability in the area from where India sources two-thirds of its imports of crude oil. Two facts are important to underline: India currently imports around 80 per cent of its total annual requirement of crude oil; and oil imports comprise one-third of the value of the country’s total imports.
In the recent past, international oil prices have been extremely volatile. During 2008, crude oil prices jumped from $40 a barrel to $147 a barrel before collapsing again to $40 a barrel. Though in 2009 and 2010, prices rose steadily to around $90 a barrel before spiking to a 30-month high of $120 a barrel in February, after the unrest in Tunisia and Egypt. Mr Mukherjee says high global prices are a reality we have to live with. But the situation could deteriorate if the civil war in Libya escalates, exacerbating short-term supply-demand imbalances despite higher output from countries like Saudi Arabia.
Returning to India, what the FM has done is inexplicable. In his Budget for 2011-12 presented on the last day of February, by which time prices of crude oil were on the boil, he curiously assumed that there would be no extra outgo on oil subsidies. In fact, he actually pared the Union government’s total subsidy bill by `20,583 crores, which is clearly unrealistic.
Whereas the government deregulated petrol prices in 2010, the prices of diesel as well as kerosene and liquefied petroleum gas continue to be administered.
Will the neoliberal hawks now decide that the best way ahead would be to not allow “under-recoveries” of public sector oil refining and marketing companies to go up substantially while also not increasing the government’s deficit too much? This would clearly imply higher prices to consumers.
Diesel is the largest selling petroleum product in India in terms of tonnage as well as value, accounting for roughly 40 per cent of the total value and around 60 per cent of the total volume of all petroleum products sold. Importantly, diesel is the main fuel used for transportation. Higher diesel prices have a cascading impact on the prices of a very wide range of articles of mass consumption, especially food items. Since retailers tend to increase the prices of goods transported by a higher proportion than the rise in transport costs, a cascading impact occurs.
Petrol, unlike diesel, is consumed primarily by the rich for personalised transport. But the same is not true for LPG which is used by the middle classes and kerosene which is supposed to be used by the poor for cooking and lighting but which is illegally diverted in large quantities (to adulterate petrol and diesel) and smuggled out of India.
Targeting of subsidies is easier said than done. Oil companies have tried to ensure that commercial users of LPG use cylinders that are not red in colour with limited success. The price of a cooking gas cylinder would be `150 higher than around `350 at present if subsidies were removed.
The administered price of kerosene went up from `9.30 a litre in January 1998 to around `12.50 a litre in June 2010 — still, the government subsidy on each litre of kerosene is `18.
All sorts of measures have been unsuccessfully tried to curb diversion of kerosene — from colouring it blue to putting chemical markers in the liquid. But the incentive to adulterate continues because of the yawning gap between kerosene prices and those of diesel and petrol.
What the government does not publicise is that total taxes on petrol are more than half its selling price and over 30 per cent of the price paid by a consumer of diesel is in the form of taxes. Roughly 37 per cent of the selling price of petrol comprises excise and customs duties, which accrue to the Union government. Excise duties on petroleum products contribute over 40 per cent of the Indian government’s total excise collections.
Importantly, customs and excise duties on crude oil and petroleum products are ad valorem or a percentage of value which implies that tax revenues go up as prices rise, which is good for the government but bad for the consumer.
Since the government seems keen on protecting the health of the fisc by not cutting taxes, not the health of the aam aadmi, there is a strong possibility that after the Assembly elections get over, even before the poll results are announced on May 13, the prices of diesel, LPG and kerosene could go up. As for controlling inflation, forget it.