On June 04, 2008, when the minister of petroleum and natural gas declared the petroleum price hike, it was hardly a surprise. It had become a necessity, rather. And the entire credit for creating a mess goes to our own elected politicians.

Politics was always a dirty game, and politicians have made it dirtier. Adding oil has made it murkier. The government seems to look like a set of corporate profit-centres or strategic business units (SBUs) and each vie for their own pie. So far so good, but the problem starts when these units stop thinking of achieving a common ‘corporate’ goal. Rather than tackling the oil price problem as a whole, it starts taking shape of a dog-fight between the Ministry of Finance (MoF) and the Ministry of Petroleum and Natural Gas (MoPNG), not to be left behind, the other ‘oil-price hike’ affected ministries, like fertilizer, heavy industries, railways, etc. MoF’s target is to achieve the revenue target (central and state tax/duty and dividend revenue from oil sector is almost 20% of the entire government collections) and only intense lobbying helps if tax needs to be reduced. Although, tax and levies are abnormally high and make the retail selling prices higher, nobody wants to touch it even with a barge pole. States are equally responsible for charging heavy tax, which in some cases is ~20-30%. The result is a price, which hurts the pocket of masses.

India imports 72% of crude, and the entire purchase is dollar-denominated. A depreciating rupee makes the matter even worse in case of spiraling prices. Even if there is no further increase in price (~US$ 130/barrel) and estimated demand (~120 TMT) of crude for 2008-09, we will be handing over US$ 100 billion to oil-exporting countries in Mid-east and Africa. In such a case, a foreign exchange reserve of ~ US$ 300 billion (as on Mar 2008) does not look too much, considering a developing country’s voracious need for money. Volatility of crude price is beyond out limit and all oil-importing companies are merely victims of this situation.

There are lot many discrepancies (other than tax and duties) in petroleum pricing in India and hence should be tackled immediately. Artificially lowered diesel prices have encouraged many industrial units to use it in place of furnace oil, which, though, an inferior fuel is costlier because it is linked to global crude prices. If we compare only crude-oil price with the product-prices, we will be in a better condition to appreciate the fact. Only Indian retail petrol price is higher than the current crude price, prices of rest- diesel, LPG, kerosene- are lower. Other associated logistic and manufacturing costs are over and above this. The question is- Who is paying for this? The answer is, directly it may be the oil companies, but ultimately the entire country is going to face the music. Fuel-subsidy in India, at current prices, will be ~ 2.2% of GDP or ~ 50% of entire fiscal deficit. The communists or other protestors against the price hike will soon realize that ultimately it is going to hurt the poor masses and in a much severe manner. Further worsening of this condition can have cascading effects on the economy, such as currency depreciation, interest rate hike, higher prices and even downgrading sovereign rating etc.

We are going to face tougher days ahead, if the conditions do not change for good. This price hike does not seem to have any fundamental basis (supply-demand situation). Rather it is driven out of theories spread by panic-stricken buyers (who believe that crude oil reserve is going to be end tomorrow) and greed-stricken sellers (who deliberately believe these theories to be true). This price hike is surely going to hit the global consumption as well. No one knows when this is coming to an end and if US$ 200/barrel is going to be a reality, prudence may be the only solution.

Amen!