Oil Prices:

Deregulating – In Whose Interests?

Tapas Ranjan Saha

On 25 June, in yet another cruel blow to the common man reeling under surging food prices and unabated inflation for more than two years now, the UPA Government declared a steep rise in all petroleum products – the second significant hike in the last six months. While the first hike four months back was effected using the traditional instruments of customs and excise duties, the hike this time has been brought into effect through a regime change in oil pricing by finally deregulating oil prices so that “the pricing of Petrol and Diesel both at the refinery gate and the retail level will be market-determined.” At a meeting of the Empowered Group of Ministers, chaired by the Finance Minister, the Government took this much-hyped “historic” decision to decontrol petroleum prices and effect an immediate increase in the price of petrol by Rs 3.50 per litre, diesel by Rs 2 per litre, kerosene by Rs. 3 per litre and LPG by Rs 35 per cylinder in Delhi “with corresponding increases in other parts of the country”. The announcement goes on to add, “further increases will be made by the Public Sector Oil Marketing Companies (OMCs) in consultation with the Ministry of Petroleum & Natural Gas”, while as a routine palliative stating “that in case of a high rise and volatility in international oil prices, Government will suitably intervene in the pricing of Petrol and Diesel.”
Justifying the deregulation and price hike in the name of “Government’s budgetary constraints and the growing imperative for fiscal consolidation, and the need for allocating more funds to social sector schemes for the common man”, the Government press communiqué goes on to add the following: “Market determined pricing of Petrol and Diesel is expected to do away with the OMCs’ under-recoveries on these two products, which are projected to be approximately Rs.22,000 crore during the remaining part of 2010-11. This will not only improve their financial health, it will also enable Government to allocate greater resources for social sector schemes. Market determined pricing is expected to attract higher investments in the fuel retail sector, and by spurring market competition, encourage OMCs to reduce costs, improve efficiency and service standards. Market determined pricing will also incentivise fuel conservation and encourage the consumer to adopt fuel efficiency practices.”
Peddled as “recommendations” of an “expert” group  (under the chairmanship of Dr. Kirit Parikh) appointed “to arrive at a viable and sustainable system of pricing of petroleum products” the above decisions are neither unique nor authentic, rather a rehash of neo-liberal clichés of market fundamentalism driven by cartelised MNCs, big corporates and international agencies like the IMF and World Bank. In fact, way back on 2 December 2009, Hindustan Times published a candid story titled “IMF asks govt to deregulate oil prices” where it stated “The International Monetary Fund (IMF) has advised India to deregulate fuel prices, which it said is the best way to deal with the volatility in crude oil prices in the international commodity markets. ‘Although politically difficult, price deregulation and full pass through is the best solution to deal with volatility in crude oil prices,’ said IMF in its response to an expert group under former Planning Commission member Kirit Parikh looking into the smoothening of petroleum products pricing in India.”  One wonders what happens to the Government’s “concerns” for “fiscal prudence” when it spends crores on committee after committee – only to “honour” these essentially Fund-Bank ideologues who end up re-typing Fund-Bank prescriptions with the least regard for the facts and concerns at hand. No wonder, the Sensex, corporate world and its captive media went dizzy over Government’s move to deregulate oil prices which according to them was long overdue.
The Parikh Committee, the Government and the neo-liberal bandwagon have hinged their arguments on the issue of rising “under-recoveries” of public sector Oil Marketing Companies (OMCs). They would have us believe that when the domestic prices of oil products are controlled but the price of imported crude oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute, leading to losses or what they term as ''under-recoveries'' for the OMCs like Indian Oil Corporation (IOC), Bharat Petroleum (BPCL), Hindustan Petroleum Corporation (HPCL) etc. But what is the truth?
The Bogey of

Successive Annual Reports of Petroleum and Natural Gas Ministry show that all the oil sector undertakings are earning huge post-tax profit for the last one decade. The Profit Before Tax (PBT) and the Profit After Tax (PAT) earned by the Public Sector Undertakings in the Oil Sector as a whole during 2006-07 were Rs. 50,717.50 cr. and Rs. 34,268.59 cr. respectively. The PBT and PAT for 2007-08 were Rs. 47,624.61 cr. and Rs. 32,149.54 cr. respectively and for 2008-09 PBT was Rs.45130.25cr. and PAT was Rs.29, 638.49cr. In these overall figures, not just the upstream companies like ONGC, but also the downstream oil sector companies – the OMCs – which are touted to be “suffering” from the much-hyped “under-recovery”, enjoyed healthy profits. For example, net-profit (ie Profit After Tax) of IOC has been Rs.6,963 cr. (for 2007-2008) and Rs.2,950cr.(for 2008-2009). For HPCL and BPCL the corresponding net profit figures for 2008-09 stood at Rs.712cr. and Rs.3,170.48 cr. respectively.
Clearly, it is important to understand and underline that the so-called “under-recovery” thesis does not mean actual “losses” for OMCs. “Under-recovery” is indeed a notional category coined by the neo-liberal think-tanks that seeks to calculate the difference between the actual price realised by the OMCs by selling their petroleum products and a notional price called the import parity price that would have been paid had these products been imported from the international market of petroleum products. Thus the so-called “under-recovery”, far from indicating any actual observed “loss” of the OMCs, refers at best to the still excess profit that they might have got had they sold their products “freely” at international markets.
So when there is no actual loss, and in fact there is healthy profit, why is the Government deregulating the oil sector pricing? The Government, pursuing the neo-liberal agenda, has an instant answer to hide its real intentions. It says, as we have quoted above, that it wants to ‘reduce’ its ‘subsidy burden’ on petrol, diesel, kerosene and LPG, prune down its fiscal deficit and ‘channelise’ money thus available for social sectors to benefit the aam aadmi. But is the Government really subsidizing the oil sector?
The Myth of “Subsidy Burden”
The data provided by the nodal agency, “Petroleum Planning and Analysis Cell” calls the bluff of this argument too. While the Government may be subsidizing individual products like LPG and kerosene to a targeted section of the population and underwriting a part of the notional “under-recoveries” of the OMCs, the oil sector as a whole – by way of sales tax and other levies to state exchequers and custom duties, excise duties and host of other levies to the central exchequer – contributes hugely to the Government exchequer and is in fact the most significant money spinner for the Government. Total Government receipts from the oil sector stood at Rs.1,57,219 cr. for 2006-07, Rs.1,71,731 cr. for 2007-2008, Rs.1,61,798 cr. for 2008-09 and Rs.1,83,861 cr. for 2009-10. 
What have been the overall subsidies from the govt. to the oil sector during these years? Let us note that the much touted “fiscal subsidies” by the Centre on account of LPG and PDS Kerosene are merely to the tune of Rs.2,524 cr. in 2006-07, Rs.2,641 cr. in 2007-08, Rs.2,688 cr. in 2008-09 and Rs.2054 cr. in 2009-10. Even if we add the notional “under-recovery” of OMCs on account of Petrol, Diesel, Kerosene and LPG, the total of “fiscal subsidy plus under-recovery” figures turn out to be Rs.51, 911cr. for 2006-07, Rs.79,764 cr. for 2007-08, Rs.1,05,980 cr. for 2008-09 and Rs.48,105 cr. for 2009-10. Who is then subsidizing whom?
The moot question that needs to be asked is when the public oil sector companies are maintaining healthy profits and the Government too is earning handsome revenue which far exceeds its subsidy component to specific petroleum products, why is it creating a fiction of “loss” and “subsidy burden”?
A Political Choice: Classes Over Masses
Clearly, the move for deregulation of oil prices has nothing to do with any actual financial “losses” (since there is none) of OMCs nor with the much trumpeted “subsidy burden” destabilizing fiscal balance of the central government. However, as we are going to argue, deregulation has everything to do with the political choice that the government is making to benefit the specific classes and cartelised private corporate players for whom the petroleum sector - from exploration to marketing - has been offered on a platter as a core agenda of neo-liberal restructuring of our economy.
Moves to open up oil sector are not new. While the Administrative Pricing Mechanism (APM) regime was introduced in mid-70s following the oil shock, opening up of the oil sector emerged as a major thrust area for the ruling class in the post 1991 reform era. But given the sensitivity of the issue, successive governments hesitated to go ahead whole hog with the agenda. The mid-90s saw one of the first definitive moves in the direction with the appointment of an “R Group” involving “experts” from the government and the private sector. The R Group submitted its report in 1996 suggesting the dismantling of the APM and tariff reforms. The government accepted these recommendations and brought out a notification in November 1997 announcing phased dismantling of the APM from April 1998 within a fixed time frame of four years. It was then, in 2002, that the NDA Government (led by the BJP which is now shouting itself hoarse against petro-price hike) dismantled the APM for the first time. Then, too, the government stopped short of complete deregulation, and retained many of the restrictive provisions. This time around, the government, riding on the shoulders of three successive ‘expert committees’ – the Rangarajan Committee, the Chaturvedi Committee and finally the Kirit Parikh Committee recommendations – has sought to justify its premeditated and long-planned plunge.
It is the urgent agenda of the ruling class that private capital must be ensured a significant share in the burgeoning Indian petrol and diesel market touching 60-70 billion litres per year worth around 2.5 lakh crore. The government’s agenda to fulfil the “necessities” of the private players willy-nilly changed its priorities too; after all the private players cannot be asked to remain content with some modest cost-plus pricing of APM era which guarantees moderate profits that were happily acceptable to public sector undertakings. Hence the shrill denigration of public sector undertakings, projecting them as ‘inefficient’ and running into ‘losses/under-recoveries.’ By hook or crook, demand and speculation-driven international prices had to be projected as the panacea, as only such high prices, generated in New York Stock Exchange and Chicago Commodity Exchange by large cartelised financial and commodity speculators, can cater to the private players’ insatiable urge for huge mark-up profits. It doesn’t matter to the government if in the process domestic prices of petroleum products are mortgaged to international speculative volatility and the majority of country’s population, already reeling under poverty and inflation, are further squeezed out of access from essential fuel and energy supply and are forced to pay through their nose for higher and higher inflation as petroleum products constitute nearly an universal intermediate.

“Parikh Committee Recommendations:
Bad for the Country, Worse for the Aam Aadmi”

About 500 million Indians are living without electricity, about 700 million are dependent upon biomass as their sole or primary energy source for cooking and about 400 million are living in poverty. We have effectively priced and taxed modern commercial energy outside the reach of this segment of our society. How is freeing prices and reducing subsidies going to help these unfortunate Indians?
… Barring public distribution system (PDS) kerosene, the rest of the petroleum products are currently priced outside the reach of the bottom two-thirds of Indians and the report of the committee talks of further inflationary price increases. Access to modern commercial energy in India is one of the lowest in the world and worse than in some sub-Saharan countries. Everyone among the bottom two-thirds of India does not have access and/or the capacity to pay for even the PDS kerosene. And even if one assumes that the top one-third does not consume any PDS kerosene (a completely incorrect assumption considering the amount of leakage and adulteration) the per capita allotment of PDS kerosene to the bottom two-thirds of the population is a little over one litre a month. But even this abject subsistence level of allotment (actual consumption is much lower) is not spared.

- Surya P Sethi, formerly Principal Adviser (Energy), Planning Commission and member-secretary of the committee that produced the Integrated Energy Policy Report 2006, ‘Analysing the Parikh Committee Report on Pricing of Petroleum Products’, March 27, 2010, EPW

Government and neo-liberal ideologues of course try to eulogise international prices as reflecting ‘global competitiveness’, ‘efficiency’ in resource use and ‘quality’ of products, while decrying regulated prices as markers of ‘inefficiency’ and ‘distortions’ in resource allocation and product usage. But nothing can be more self-deluding. After all, is it not well known that there is nothing competitive about global prices of either crude oil or petroleum products? With the rise of oil futures, and the fact that oil prices are quoted only in dollars and internationally traded in New York and London, oil prices are determined in Wall Street through speculation driven demand and no longer by OPEC based on supply. Such futures speculation typically jacks up the spot prices too. This preponderance of what has come to be known as the “strange new world of ‘paper oil’” ruled by “major oil trading banks such as Goldman Sachs or Morgan Stanley” that moved the determination of international oil prices from the hands of producers to the hands of speculators, holds the key of international oil prices today. The Levin-Coleman Report of the US Senate Sub-Committee (2007) which investigated ‘The Role of Market Speculation in Rising Oil and Gas Prices’ gives a breathtaking account of speculative oil pricing. Add to it the ulterior agenda of political superpowers like US which has doubled strategic oil reserves from 350 million barrels to more than 700 million barrels in the last couple of years. Mandarins of market fundamentalisms of course have no answer to such phenomena except parroting their well known wishful doctrines. Deregulation of domestic oil prices in the present global market condition, therefore, is simply incapable of producing lower petroleum product prices. Pricing of essential commodities like oil cannot be subjected to permanently speculative accumulation of a cartelized market of local or global speculators. 
Finally, the cruellest cut of all is the government’s attempt to justify deregulation by piously invoking concern for the ‘aam aadmi.’ The anti-people fall-outs of the move can hardly be overemphasised. Petrol and diesel being universal intermediates, their price hike is bound to have a massive cascading effect on the present food-price inflation of a whopping 17% and overall inflation crossing 10%, far exceeding the finance ministry’s banal assurances. Then the government and RBI would step in to do their routine window-dressing of “tightening” the monetary policy and jacking up interest rates and thus adversely affecting investments further. The purchasing power of the common man will be further squeezed due to higher prices of transport, food and other essentials, while a vast majority will be priced out of whatever little access they have fuel and energy usage.

The move to deregulate oil prices is nothing but a deliberate ploy to pander to the profit motive of private players in the oil sector – in the process surrendering sovereign control over a crucial resource, and a key policy tool with regard to inflation, leaving the masses and sovereign developmental choices at the mercy of the local and global speculative cartels and international political forces which manipulate oil prices to suit their own interests.