Oil price spurt throws reforms out of gear again

Galloping oil prices imply the scheduled deregulation of the import and pricing of aviation turbine fuel (ATF) may be postponed further. It implies that the subsidy on cooking gas will not come down to 15 per cent as was intended in three years ago.

Another 20 per cent increase in kerosene prices after the 30 per cent price hike in March will also require a bold political decision, almost impossible in a coalition government. Even March increases in oil prices were opposed tooth and nail by BJP allies and had to be postponed more than once.

The Cabinet’s decision to revise diesel prices every 60 days is among the policy milestones, that policy-makers prefer not to remember. If they did, the transport and power plant fuel would have to turn dearer every month.

As long Brent prices ride at $27 a barrel and West Asian crude (which make up most of our imports) stay at $26.5 a barrel, petro-fuel prices will also look skyward.

Keeping petro-product prices stable at home will push up the subsidy burden, now borne by the oil pool account, a kitty that cross-subsidises prices of controlled petroleum products. The price reforms in the petroleum sector is really all about trimming that subsidy.

The phased dismantling of the administered pricing mechanism (APM) that began in September 1997, should have trimmed most of the subsidy on petro-products by now.

At the end of next year the oil market should have been completely free, barring a small amount of subsidy on kerosene and cooking gas (LPG).

Even as the Union petroleum ministry ponders on the political consequences of another oil price hike, petro-fuels prices gather the subsidies they were not intended to. Petroleum products still controlled by the government, like petrol, diesel, cooking gas, jet fuel and kerosene, make up close to 70 per cent of all the petro-fuels consumed within the country.

To trim those subsidies the Union government will have to increase prices of diesel, kerosene and liquefied petroleum gas once again. Diesel prices had been raised in October last year. In March kerosene prices went up by 125 per cent and cooking gas turned 30 per cent dearer. Jet fuel prices were increased as well.

Yet the subsidy on kerosene remains more than 100 per cent. The subsidy on LPG cylinders is close to 67 per cent. A hidden subsidy of Rs 1 a litre on the retail price of diesel is a monthly drain of Rs 500 crore, which shows up as a deficit in the oil pool account.

Union petroleum minister Ram Naik admitted last week that the retail price of diesel contained an unintended subsidy of Rs 2.12 per litre. Diesel prices were meant to be market-driven since September 1997 and have been pegged to global rates since then.

The Organisation of Petroleum Exporting Countries (Opec) cartel have upset the schedule for dismantling the administered pricing mechanism (APM) before. When global petro-fuel prices were downhill, diesel prices were `revised’ regularly to bring them on `import-parity’ levels. When the oil producing Sheikhs began to turn off their taps and gasoil (diesel) prices began to race, policy-makers at hoe began to dither, because pegging diesel prices to global rates would have meant inviting mob fury at home.