A Crude Sense Of Humour

It’s worse than getting stuck in an oil slick. At the petroleum ministry and the industry body that keeps the oil pool account in shape, anxious souls are waiting impatiently for the prime minister to return from the US. In Vajpayee’s absence, there are few even in the entire government who would attempt a political harakiri by raising petroleum prices.

The government has been sitting on the fence for quite some time now. Avoiding a definitive decision even when the oil pool deficit started inching up from Rs 6,000 crore on March 31 to Rs 10,000 crore now. Even when the oil import bill was expected to be $17 billion. Even when global crude prices galloped from $28 a barrel, on which the original petroleum import bill calculations were based, to $35!

Now, that was a new high in a decade. Last weekend, the power cartel of 11 oil exporting nations called opec met in Vienna to seal a new production pact, its third in seven months, to increase output by 8,00,000 barrels per day (bpd) to 26.2 million bpd. As feared, the news did nothing to quell fears and large-scale protests all over the globe, specifically in Europe where high taxes and duties make all fuels the world’s most expensive. In June, when opec raised output last, it had vowed to control production in a manner so as to keep crude prices hovering between a band of $20 and $28 per barrel. Brent crude oil was barely $23 when the year began, and since 1998, has tripled.

Clearly, the promise was not kept. International output of crude has been shrinking and global prices of the commodity are at the highest since the 1991 Gulf War. As the winter months set in, traditionally the time when fuel consumption goes through the roof, especially in the energy-guzzling western countries, and as oil price rise fuels fears of inflation denting world growth, a meagre 8-lakh-tonne hike in crude output is unlikely to pacify worried souls in the developed world.

In India, however, petroleum minister Ram Naik is putting up a brave front. Despite petrogoods prices holding their own for about a year now, he has promised consumers that the burden will be less on them in terms of a price hike. On the contrary, he would try and make up the oil pool deficit more through oil bonds and revision of taxes on petrogoods to mitigate the effects of a price hike on the economy.

Globally, the most recent crude output hike is expected to have some impact but nobody expects the price to come down to $25 a barrel or below. opec has promised another 5-lakh-tonne production hike, but only after it carries out a market review in November. Naik, however, hopes that even if the global price of crude stabilises at $28, consumers may be spared. At $33 a barrel, India’s oil import bill will straightaway double from last year’s $13 billion.

The impact could be worse than that. Right now, the Indian rupee is at its weakest against the dollar. If oil prices hold at their current levels, even the pool account will be deeply in the red by Rs 12,000 crore by the end of March 2001. And why not? India produces only about 32-33 mt, while demand is spiralling. From only 90 mt in 1998-99, it is expected to cross 103 mt in 2000-01. More than 70 per cent of India’s demand is thus fed through imports.

But is price hike the only answer to bridging this yawning gap? It’s an emergency measure, yes, but addresses not even a part of the bigger problem. Which is, bad management of the oil economy and high taxes.

For instance, the Administered Pricing Mechanism (apm), recommended to disappear in 1997, still continues. Along with it, subsidies on kerosene, diesel and lpg, at Rs 6 per litre, Rs 3 per litre and Rs 165 per cylinder, respectively. Prices are still fixed for petrol and atf. Experts, therefore, say that part of the problem could be solved if apm was dismantled immediately.

Wishful thinking in a country that adheres to democratic functioning like jelly on a slice of bread. A more workable solution would be to reduce the duty impact on crude and petroleum products. Says a petroleum expert: "A substantial part of the domestic oil price is taxation. There is a tremendous temptation in the finance ministry not to interfere with the pricing as the current tax structure fetches them a lot of revenue. Forget the oil bill or the oil pool deficit, the truth is that the government is actually making big money within the country by taxing petroleum."

At present, crude is subject to 15 per cent customs duty, motor spirit (petrol) attracts 25 per cent customs duty and 32 per cent excise duty, high-speed diesel attracts 25 per cent customs duty and 16 per cent excise duty and atf is subject to 25 per cent customs duty and 16 per cent excise. Kerosene, although exempt from customs duty, still attracts eight per cent excise duty. Additionally, an amount of Rs 1,000 per kilolitre is levied on petrol and diesel each as road cess.

Says economist S.L. Rao: "First, this entire stupidity of administered pricing has to go. The mentality of taxing petroleum has to change. There has to be a limit on tax. Instead of the present system of ad valorem taxation, the tax should be in absolute terms. At the same time, the tax amount should be frozen at that absolute amount. This way the finance ministry can get its revenue and the prices of petrogoods will be lower. Now with every increase in world petroleum prices, the tax element also increases and the final price after taking into account subsidies etc, is much higher. This is wrong."

Officials say the government’s panic over soaring oil prices is unnecessary and they agree with Naik that the increase in global crude prices could well be a short-lived phenomenon. Says one: "Apart from the opec deal, the United States, the largest oil consumer, is actively negotiating with oil producers to bring the situation under control well before its November presidential elections." And prices could stabilise in the next two weeks. Says Rao: "I expect crude prices to come down to $26 per barrel by October."

That doesn’t obviate - even put on a backburner - the need for reforming the oil sector. Naik, who is at the forefront of the crusade against privatising oil companies on the plea of strategic sector, is probably not the right person to do that. Is he also up to a stiff battle against the finance ministry for a more rational tax structure? Any which way one looks at it, a rising oil pool deficit, which is taken into account by global development and credit-rating agencies as part of a bigger fiscal problem, doesn’t augur well for the finance ministry and its job for the year - that of keeping India’s fiscal deficit within a controllable limit.