No longer over a barrel on oil prices | india | Hindustan Times
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No longer over a barrel on oil prices

india Updated: Aug 10, 2008 20:36 IST

With global crude prices hitting a three-month low of $116 a barrel, it’s not exactly tapdancing time. But there is cautious optimism in the air. The hope is that domestic inflationary pressure may climb down from its current 12 per cent high to single-digit levels by March 2009. The sharp fall from record highs of $147 a barrel ought to comfort the government that has been dreading the prospect of raising petrol and diesel prices in October. Although it is premature to infer that oil is off the boil, this is a favourable time to put in place a more rational pricing mechanism. State-owned oil majors have been bleeding from the existing pricing regime that insulates the middle- class from the soaring international prices of oil. Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. narrowly escaped losing their navratna status that gave them freedom to decide on projects and invest up to Rs 1,000 crore without government permission.

With this reprieve in oil prices — which hopefully will persist — the government ought to ensure that these State-owned oil majors get their finances in order. HPCL and BPCL’s near-fall from grace were due to its policy of protecting the aam admi from oil inflation, especially in view of electoral compulsions. As a result, these companies had to be given oil bonds and subsidies from domestic crude producers like the Oil and Natural Gas Corporation Ltd. to be compensated for losses due to cheaper fuel sales.

Interestingly, ONGC is willing to pay a super-profit tax on the revenue it gains from oil at above $50 a barrel if the government scraps the ad hoc system of asking it to compensate for HPCL and BPCL’s losses. ONGC’s argument was that this ad hoc system was against listing ethics and would bring about greater transparency — a factor that is lacking in the political fixation of domestic oil prices. The government also feels that it cannot endlessly subsidise the losses of oil companies. The B.K. Chaturvedi panel that was appointed to find ways to reduce subsidies says that fuel prices need to be revised every month. What better time is there to revisit the need for a more rational pricing mechanism?