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The call for free market pricing for petrol and diesel is back. This time with a twist

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With the new mandate, the new government and the brains behind the government are thinking about introducing the market controlled petrol and diesel prices. Simply put the petrol prices will work exactly the same way as it does in the US with a twist.

oilbarrel

The twist is this. The oil marketing companies can decide upon the rate at which they will sell a liter of petrol or diesel as long as the oil per barrel rate remains below $60 (or $70 or whatever the chosen number). If it crosses that level government will step in and decide the price.

That looks like a very interesting prospect and possibly the only solution for India. Two things are taken care of with this proposal. One is the loss of revenues for Oil marketing companies, which are magnified when the oil is at $147 per barrel. Now, those losses will be minimized if the barrel is below $60. The losses are not gone completely.

Second thing is letting the marketing companies run the prices which itself is a danger. These companies can typically work like a cartel, and the prices at the highest level. This would defeat the purpose of introducing the market rated prices.

There is still a risk of cartel when the oil rate is below $60. But, we have to trust at some point and this might be it. $60 per barrel looks like the threshold for a win-win solution for the consumers and the companies.

I sincerely hope this time it is real. Without even considering the merits and demerits – if we have tried it once – then we will have enough evidence to know what works best.

If introduced this should put a lid on the free market pricing once and for all.

With so much back and forth happening in the past years, will it happen this time? If it does how will you take it?

Image credit

  1. pankaj says

    I saw a whole discussion, dear I want to tell you that before the parliamentary committee 2004-2005 bharat petroleum chairman some portion as
    OBSERVATIONS AND RECOMMENDATIONS.

    68. The Petitioners have in their petition mainly raised the
    issues of adulteration of petroleum products and other malpractices
    including short delivery of these products; benami ownership of retail
    outlets of petrol/diesel and misuse of quota of outlets reserved for
    Scheduled Castes/Scheduled Tribes and physically handicapped persons;
    use of sub-standard/spurious gas cylinders by the retailers and
    wholesalers and the need for more CNG/LPG gas outlets being opened and
    exercising some control over the Dhabas which have proliferated near
    the petrol pumps along the National highways and have become conduits
    for illegal selling of drugs and liquor. They have also raised some
    other related issues like the artificial scarcity of petroleum
    products being created by the dealers of petrol pumps in view of
    anticipated hike in their prices to exploit the consumers by demanding
    higher prices from them and the concept of vicarious liability being
    applied to the oil companies in case any of the outlets allotted by
    them is found to be indulging in adulteration or other
    malpractices/irregularities or even unauthorizedly sub-let or sold to
    the third person. The views/observations of the Committee on each of
    these issues with the issues regarding adulteration/malpractices etc.
    being brought under one head are given below: –

    Adulteration of Petroleum Products

    69. The Committee has noted that the complaint about adulteration
    of petroleum products and their short delivery at the retail outlets
    made by the petitioners is a general one reflecting the perception of
    the ordinary consumer and they have not cited any specific cases or
    adduced any statistical data to lend credence to their contention.
    Nonetheless, neither the Secretary, Ministry of Petroleum and Natural
    Gas nor the Managements of Public Sector Oil Companies have denied
    during their submissions before the Committee that it has totally
    stopped. As a matter of fact the figures given by the Public Sector
    Oil Companies as shown in Appendices – III, IV and V appended to this
    Report clearly establish that the adulteration and other
    malpractices/irregularities at the retail outlets do take place. The
    Chairman and Managing Director of the Bharat Petroleum Corporation
    Limited was candid enough to admit before the Committee that the
    adulteration of petroleum products in the country has been going on
    for a long time and cannot be checked in totality. The main reason
    attributed by all of them to this phenomenon was the disparity in the
    prices of different petroleum products due to subsidy or taxation
    structure. Naphtha and Kerosene being available at a lesser price
    provide an inducement to the adulterators to mix them with petrol and
    diesel, respectively. This is not the case only with Naphtha or
    Kerosene but a number of other adulterants/solvents like Hexane,
    Benzene, Pentane and C9 also which seem to be freely available. A
    study regarding distribution and diversion of SKO undertaken by M/s.
    Tata Economic Consultancy Services at the behest of the oil industry
    had established way back in July, 1995 that the extent of diversion of
    allocated PDS SKO varied between 20-30% at All India level. There are
    varying estimates about the quantum of revenue loss to the exchequer
    due to flourishing adulteration trade and according to one estimate
    while the scam could be worth Rs. 40,000 crores a year, the annual
    revenue loss could be between Rs. 5,000 to 10,000 crores. The Ministry
    of Petroleum and Natural Gas, however, on its part took the plea that
    it is not practical to accurately assess the quantum of revenue loss
    to the exchequer as the precise quantum of diversion of adulterants
    into motor fuels is not known. As it came to the notice of the
    Committee on the basis of the documents furnished to it during the
    evidence of Shri J. Prabhudas, formerly associated with the Petroleum
    Intelligence and Vigilance Cell of the Ministry of Petroleum and
    Natural Gas, one such survey was conducted by the Ministry of Civil
    Supplies, Government of India during the Secretaryship of Thiru
    Venkatasubramaniam which led to the conclusion that the loss to the
    Nation by diversion of Kerosene into HSD was almost more than Rs.
    10,000 crores per year. This figure of revenue loss was also
    corroborated in a Report submitted by a Committee headed by Shri V.M.
    Lal, the then Transport Commissioner, Maharashtra State to the
    Mumbai High Court.

    70. The Ministry of Petroleum and Natural Gas informed the
    Committee about a series of measures which have been taken by it as
    well as by the Public Sector Oil Companies to combat adulteration and
    other malpractices/irregularities associated with it. A number of
    Control Orders such as the Naphtha (Acquisition, Sale, Storage and
    prevention of use in Automobile) Order, 2000, the Solvent, Raffinate
    and Slop (Acquisition, Sale, Storage and prevention of use in
    Automobiles) Order, 2000, Motor Spirit/High Speed Diesel Control
    Order, 1998, Kerosene Control Order, 1993 banning the use of Kerosene
    for use as Auto fuel have been issued by the Ministry in terms of
    which the persons dealing in Naphtha, Solvents, Raffinate and Slops
    are required to obtain license from State Governments and file end use
    certificates and customer wise sales with the State Governments on a
    quarterly basis. An elaborate mechanism has also been provided at the
    level of Oil Marketing Companies (OMCs) in the form of periodical
    inspection of retail outlets, test checking of samples, retail
    automation, vehicle tracking system, measuring density of product,
    special vigilance drives, deployment of stationary and mobile labs,
    blue dyeing of Kerosene, independent third party inspection, use of
    marker system for checking adulteration of MS and HSD and introduction
    of tamper proof locking system for tanker-trucks. Initiatives such as
    ‘Operation Everest’, ‘Pure for Sure’ and ‘Club HP’ to provide right
    quality and quantity of fuel to the Consumers at the retail outlets
    have also been taken. Action is taken by them against the delinquent
    dealers indulging in adulteration or malpractices/irregularities under
    the Marketing Discipline Guidelines/Dealership Agreement. The
    Committee, however, feels that these steps do not seem to have yielded
    the desired results and the Control Orders remain more on the paper.
    The results of the inspections of the retail outlets as furnished to
    the Committee give the impression that the problem of adulteration is
    not that acute as it is portrayed to be, which may be far from the
    reality, especially when the possibility of the field officers of the
    oil companies being in collusion with the dealers and the information
    about inspections reaching them in advance cannot be ruled out.

    71. The Ministry of Petroleum and Natural Gas in its comments on
    the petition furnished on the 13th January, 2003 had inter-alia,
    apprised the Committee that an Anti Adulteration Cell (ACC) headed by
    a Director General of the level of Joint Secretary had been
    constituted by the Government with four regional offices in Delhi,
    Mumbai, Kolkata and Chennai to overview the issues arising out of
    adulteration. Subsequently, however, during the evidence

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    http://youtu.be/zRl9YC1vt0w

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  2. Kanchan Kumar says

    well said Sir, if government can implements this its good for companies as well as the normal man but if you do consider that this is because other countries are doing this we should do this, no.. if the government is planning to do this they have to make sure some of the things.

    – First Government should remove heavy taxes that are there which is too much higher as compare to other countries.
    – Second the government should see that supply of fuel is uninterrupted.
    – They must ensure that this will not put the burden on other commodities or other daily use things.

  3. Nagendra says

    Hi,

    I feel loss and gain for oil companies run by BP, HP and Indian oil is imaginary valves. All companies have contract with oil rich countries/companies with fixed price. I don’t think India have purchased oil at 150 per barrel. Even some counties in the world, which are poorer than India, are giving at low price compared to India prices. I feel companies are confusing and creating wealth for Govt.

  4. Yash says

    Yes by ATF I meant Aviation Turbine Fuel.

    But sorry I don’t agree with you on that profitability front! Sure fuel is the largest cost item for airlines but they are losing money because of the over capacity and price wars. Diesel is taxed so heavily by various state governments whereas aviation industry is lobbing to get ATF listed as tax free commodity. That is ridiculous. Their business plans shouldn’t be dependent on subsidized fuels! Those guys definitely have more brains than me, they need to figure out a way to make profits.

    And the corporate social responsibility thingy!!! I assume you said that just for fun and didn’t really mean it! :) guys like Vijay Mallya and Wadias etc are not there in the business for doing service to the society for sure.

  5. Sriram Vadlamani says

    By ATF I am assuming you meant Aviation Turbine Fuel. If they de-regulate that the whole aviation industry will be in a tailspin.

    That is the last thing aviation industry wants which is more a corporate social responsibility than a profit making venture.

  6. Yash says

    Thanks Sri :)

    Fuel is a basic commodity. A spike in fuel price will cause general inflation. If diesel prices rise, it will increase the carriage charges, which will be added to the commodities being transported. It will mean a hike in the prices for everything that is sold in the market. A hike of 2 Rupees/kg in the price of rice or vegetables may not affect people like you and me but it will affect crores of other people in this country. So fuel sold to trucks and lorries should be regulated.

    Buses, taxis and autos are public transport, used by not so wealthy and middle class people, so they should also be protected.

    Private cars and bikes are sort of luxurious items. Okay bikes may not be a luxury item per se but a guy riding a bike can definitely said to be better off than a guy taking a bus. And the great mileage afforded by the bike will even out the additional cost. Private cars, well they are definitely better off than the common people out there so they must pay the premium. Tourist taxis and cars for hire also fall under this category.

    We already have a somewhat similar arrangement in palce. That’s why Diesel is pricesdcheaper than Petrol. Diesel is the fuel used by trucks and Petrol is normally for cars and bikes. But the irony is at a Fuel Station, a guy on a skooter buys expensive Petrol while the guy in a Mercedes buys cheaper Diesel! So prices should be regulated depending on the end use. It’s the same funda as income tax, if you earn more, you pay more taxes.

    What about ATF? It should be deregulated completely!

    Guess if Petrol for cars is made expensive, people might actually prefer taking public transport more often. Less traffic and good for environment too! :)

  7. Sriram Vadlamani says

    Yash, you never disappoint me.

    Can you explain a bit more why it should be done the way you said?

    LPG de-regulation sparks a lot of debate and my guess is – aint gonna happen.

  8. Yash says

    In my opinion, there should be two kinds of prices for oil depending on the end use. Fuel sold to trucks and other public transport like busses, taxis and autos should be at regulated prices. Fuel sold to private vehicles like cars and bikes should be deregulated. I am saying despite me owning a car! LPG (cooking gas) has to be regulated.

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