On public sector oil retailers deciding an uniform price

No big bang deregulation, please, we are the UPA



With the three public sector oil retailers deciding to have a uniform price,

a cartel has been created. So where will competition go?

The Government has kept an escape clause so that it can intervene if crude oil prices rise sharply.

June not only saw the weather God play his little games, but also the Government. On the 25th, just after the Prime Minister left for Toronto for the G-20 meet, it announced the deregulation of petrol prices, but not of diesel. But like Banquo's Ghost, the question is still hanging in peoples' minds: Has the Government actually given the public sector oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation — complete freedom to decide retail prices?

Pricing benchmark

The three oil companies have decided to review the price on a monthly basis. But they have not fixed any dates, nor disclosed the mechanism for deriving the price. They say giving a date would lead to hoarding. As to the formula, patience, friends, we are working it out. Issues such as to which international market the pricing will be benchmarked needs to be decided. Typically, the benchmark could be Dubai, as most imports of high sulphur crude are based on Dubai pricing. However, there have been instances when Dubai price has been higher than in other markets. What does deregulation mean for competition and pricing? With growing competition in the retail sector, prices are eventually expected to soften on the retail front. However, with the three public sector oil retailers deciding to have a uniform price, a cartel has been created.

Competition issue

So where will competition go?


Private players such as Reliance Industries Ltd (RIL) and Essar are of the view that this price should not be lower than the export realization. And if the price is higher than the export price, the consumer has to bear the burden.

Whence the question: What will be the formula?

Private players which have adopted a wait-and-watch attitude also feel that any difference between them and the public sector should not be higher than 50 paise to Re 1 a litre. Besides, the Government has only deregulated petrol price, which accounts only for about 10 per cent of the petroleum products sold. Diesel, which accounts for more than one-third of the oil product consumption, is still under Government control. Though the public sector companies have decided to have a uniform pricing, the industry expects each to undertake activities to promote its products by offering sops or price incentives.

Pricing in India

On the question of how competitive the prices in India are vis-à-vis the neighbourhood, the Ministry has said that while petrol and diesel prices in India are broadly comparable with the neighbouring countries, the prices of PDS kerosene and domestic LPG in India are the lowest among the South Asian countries. Besides, the prices of petrol and diesel in Delhi are inclusive of the quality differential on account of superior Euro-IV/BS-IV fuels introduced with effect from April 1, 2010. Also, Delhi has reduced VAT rates on diesel, effective July 20, leading to a drop in retail prices by Rs 2.50 a litre.

Comparable levels

And on why a comparison is being made among South Asian countries and not with Europe and the US, the Ministry said the comparison of retail prices of PDS kerosene and domestic LPG have been made with our neighbours for the following reasons:

They form part of the same geographical region — the Asian sub-continent. They are not only socio-culturally of the same milieu, they are at comparable levels of economic development. All of them depend on oil imports for meeting their domestic energy requirements and are thus placed in a similar position. While deciding to deregulate the petrol prices, the Government has also kept an escape clause in hand so that it can intervene if crude prices rise sharply. But the definition of sharp is not clear and will perhaps depend on the proximity to major elections. The period of uncertainty still continues. The industry feels that not much clarity will emerge before December. Will the policymakers prove them wrong, we can, perhaps, wait and watch.

by….RICHA MISRA …from the pages of HINDU BUSINESS LINE NEWSPAPER.