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We are over a barrel on oil prices

india Updated: Dec 26, 2008 22:48 IST
Hindustan Times
We are over a barrel on oil prices

Why you should be paying less to tank up your car is fairly obvious. Crude oil prices have plummeted from their $147 a barrel high this July to under $40 now. Projections are they could fall to $25 in the near future as more of the world slips into recession. The US estimates the planet’s daily demand for oil should shrink by half a percentage point.

Synchronised production cuts by the Organisation of the Petroleum Exporting Countries (Opec) and Russia, the biggest producers, are anything but those. Prices dropped 22 per cent in two days after the oil cartel that pumps out four in every
10 barrels said it would turn the tap off on 2.5 per cent of the world’s supply.

So why are you still shelling out that much at the filling station? You are today paying just Rs 5 less for a litre of petrol and Rs 2 less for a litre of diesel than you were in July. Under what the government euphemistically calls a free-pricing mechanism, fuel prices were raised once this year, in June, and lowered once, in December. The net result is that the June hike has merely been cancelled out. Leaving unaddressed much of the 60 per cent fall in the price of crude oil over the period.

As the government scrambles to lower the price line, keeping fuel prices propped up above market-determined rates appears counter-intuitive. The fisc gains, though, in the lower subsidy the government ends up paying through oil bonds. This positive spin-off is in the remote future, however, while the need for economic stimulus is more immediate. On a related issue of the cross-subsidy on cooking fuel — kerosene and gas — providing an explicit handout would not only make our oil pricing mechanism more transparent but also clear the air on the thicket of subsidies the government brushes away as below-the-line giveaways.

The trade-off is thus clear: embellishing the government’s books versus lending the economy a hand. Every day fuel price cuts are delayed, the official intent becomes more starkly defined and economic distress spreads. The political advantage of putting off the cuts till the eve of elections is convincing, but the gains on the swings could be lost on the roundabouts.