Why oil pricing is muddled in politics and populism

In June 2010, the Union government decided to decontrol petrol prices. This was a move hailed as a big reform initiative.

This had also created an impression that the government would move forward on decontrolling the prices of diesel, liquefied petroleum gas (LPG) and kerosene in the coming months.

Creating that impression were the state-controlled oil companies' decisions in subsequent months to raise petrol prices.

Since this also was the period, when the international crude oil prices were on the rise, the revisions had led to a spike in retail prices that was predictably uncomfortable for consumers.

Thus, over and above a seven per cent increase in June, petrol prices went up again by over eight per cent in December and in January 2011 by over four per cent.

There was no movement on decontrolling the prices of other petroleum products like diesel, whose price consequently saw no change, but the periodic increases in petrol prices gave some comfort to the reformers that at least petrol prices had gone out of the government's discretionary administrative control.

What happened subsequently, however, was an anti-climax. The international crude oil prices continued to rise even after January - and indeed by a sharper margin, but the oil marketing companies refrained from announcing any further price increase.

The oil companies gave no official explanation for their reluctance to increase the petrol price after January, but everybody believed that the Union government must have told the oil companies to desist from any such move.

The unstated explanation went as follows: Any further increase in petrol prices may adversely affect the electoral prospects of the Congress and its alliance partners in the Assembly elections to be held in Assam, West Bengal, Tamil Nadu, Puducherry and Kerala s in April-May.

Hence, defer any such price increase until the elections are over!

As widely expected, a day after the election results were out, the oil marketing companies announced a five-rupee increase in petrol price, which in effect meant a rise of 32 per cent in the last one year.

Clearly, this was not enough. Crude oil prices in this period had gone up by 41 per cent and even after the latest increase, the oil companies' under-recovery remained as high as Rs 5 for every litre of petrol they sold in the retail market.

Yet, the petrol price increase sparked off a heated debate over its correctness. Opposition political parties have criticised the government for the price rise saying that this would hurt the ordinary people.

The government has argued that it has decontrolled petrol prices and the decision to revise the prices lies with the oil marketing companies.

However, if one looks at the sequence of events, it becomes clear that even though the government has on paper decontrolled petrol prices, it has certainly exercised its influence over the oil companies to ensure that they raise the prices only after the elections get over.

The problem, therefore, is not whether the government has actually decontrolled petrol prices or not. Even after diesel prices are decontrolled, the government may continue to influence the oil companies in a manner that it can dictate the extent and frequency of price revisions.

This is what exactly happened even during the Vajpayee-led government of the National Democratic Alliance. Immediately after the dismantling of the administered price regime for the petroleum sector, the Vajpayee government decided that the oil marketing companies would be free to fix the prices of petroleum products.

In practice, however, these companies would be free to do so only as long as they got the concurrence and approval of the ministry of petroleum and natural gas.

This is exactly what has happened after the United Progressive Alliance government of Manmohan Singh decontrolled petrol prices.

In theory, the oil marketing companies are free to fix petrol prices, but in practice, they do need the approval of the ministry of petroleum and natural gas.

So, the government may take credit for ushering in more reforms in the coming days by decontrolling prices of diesel, kerosene and LPG, but there would be no real decontrol of prices and all price revisions for these products would require the approval of the petroleum and natural gas ministry.

Remember that the government is able to exercise influence over the petroleum product pricing decisions simply because it is also a majority shareholder in the state-controlled oil marketing companies.

Therefore, to ensure that these companies enjoy complete pricing freedom, it is not enough to change policies on petroleum product pricing. Equally important is to make the government a minority shareholder in these companies.

Once that ownership pattern changes, the government will cease to exercise any influence over the companies and chances of implementing policy reforms will improve dramatically.

These are the perils of half-hearted reforms, which successive governments have initiated without taking a holistic view of the issues at stake.

Oil pricing freedom as an idea can succeed only if the ownership of the key oil refiners (read the public sector oil companies) ceases to be government-dominated.

Whether the UPA government is ideologically prepared to undertake such deep and bold reforms is of course a big question mark, but until such time clarity emerges on this key reform area, oil pricing will continue to remain muddled in politics and populism.