Coping with $100-a-barrel oil

R S Pandey,
Coping with $100-a-barrel oil

Brent crude went past $100 per barrel early this month, triggered by uncertainties in the Arab world. The trend towards $100 became clear as demand rose on surer signs of global economic recovery. Further, with Opec firm on holding output level at the current level, prices are going to stay at $100 or beyond for the next year or so. This will have severe impacts .

The current account deficit will come under more pressure as the country’s oil imports are set to rise from today’s 80% to 92% in 2030 under the current policy framework . Product prices at retail level will spike if they are aligned with the market. Such a measure will be welcomed by oil marketing companies (OMCs) that are suffering due to massive under-recoveries due to price controls. The price hike will, however, hitconsumers, over two-third of whom live on less than $2 a day. Conversely, keeping prices in check through subsidy has implications for the fiscal deficit. How does one grapple with this situation, which is similar to one in 2008-09 when the average price of Indian basket was a little over $83 even though global crude prices flared to $147. The average price may stay at $83 in the current year too.

Some lessons from 2008-09 are relevant. An effort was made then to balance the interests of the stakeholders — namely, the OMCs, the central government and the consumer — though on an adhoc basis: the Centre abolished import duties on crude and cut those on petrol and diesel; ad-valorem excise duties on petrol and diesel were replaced by specific rates; product prices were raised; and the entire under-recovery of the OMCs amounting to . 1,03,000 crore was met by . 71,000-crore subsidies from the Centre (69%) and . 32,000 crore from upstream petroleum companies (31%).

The sales tax rates of state governments continue to be ad valorem. Since then, import duty has been reintroduced, specific excise duty rates on petrol and diesel raised by . 1 a litre and the price of petrol freed. The choice is difficult, but it is time for a rational and transparent formula to provide subsidies and, yet, decontrol prices. Taxes and subsidies distort prices. For instance, in Delhi, petrol price include about 46% tax and diesel about 30%. Also, diesel, kerosene oil and cooking gas are highly subsidised. The under-recovery of OMCs is estimated at . 75,000 crore in 2010-11.

Both subsidy and lifting retail prices are unsustainable. Duties on ad-valorem basis at high prices result in windfall profit for the government , while the consumer bears the brunt. Therefore, once again, import duties must be scrapped, as was done in 2008, ad-valorem sales tax replaced with specific rates corresponding to a particular level of crude price, say, $60 a barrel . State revenues will rise in line with rise in consumption , currently around 10% for petrol and 8% for diesel. Secondly, a transparent and reasonable mechanism of burden-sharing by upstream companies is required. (Source: The Economic Times, 7 Feb, 2011)