## Monday, February 08, 2010

### What could go wrong if petroleum product prices are decontrolled?

I have an article in Financial Express on this today.

1. First thing first:

Price risk is addressed by risk management, not govt intervention - which may even be illegal, but no one wants to talk about it.

Govt cant tell body corporates to "pass on" price volatility to end consumers. Passing on will not solve the problem, so this report is only a political document for making people take to the streets.

Govt shd tell PSUs to do active risk mgt and ensure that end user prices remain stable. If they are not capable, it can always be outsources. How do the large pvt oil cos manage it internationally !!

Its not that difficult actually, but problem is we have so many 'wise' people interested in just wasting time... and people.

2. To avoid prise rise, people should think of using public transport. Practically its impossible in India. Tax incentives and recognition should be given to auto industries as well as for oil cos for R&D. I think the awareness for efficient use of fuel should be started right from the school.

3. This is basically a big political decision. It would require political courage and statesmanship.....so I guess we know where this is heading. That said, I would be delighted to be proved wrong

4. Ajay - your data and rationale is compelling. Could you speculate the short term effects/shocks of moving to a floating oil price would have if say done today? Right now seems to be a good time to do this - commodity prices are not that bad, Govt. is stable enough and not looking to the next election. However, rising inflation is a concern. I wonder what the short term effects of something like this would be (I understand that to some extent the degree of subsidy in place at the moment would have an effect and if that is large, a gradual convergence would be adopted instead of a sudden floating).

5. What is really scary is what is happening with Iran right now. What if the US or other countries decide to try to blockade Iran's exporting of oil - that could be catastrophic for prices. I am sure China will gobble up that oil though.

6. Frankly,
I don't buy the fact that government is subsidising petrol. In US it is completely decontrolled and Indian retail prices are considerably higher than US. SO the options are:
1) Government taxes petrol more than it subsidises, resulting in the higher prices. It presents the subsidy as a petrol subsidy without presenting the tax asa petrol tax, thereby misleading people.

2) The oil companies BPCL, HPCL etc. are overstaffed and inefficient, inflating costs. Thus what the government is paying is not petrol subsidy but labour subsidy.

So the root cause should be addressed instead of simply calling it petrol subsidy because the Indian consumer is definitely NOT being subsidised at the petrol pump.

7. Thanks Ajay, It will definitely be helpful to all of us to get a clear look of what changes are happening recently.
this is the nice information shared with us.

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