Who is to blame…?

World over, prices of oil are rising like never before and most of the economists and energy trades call is a pure speculation. Some people blame OPEC for not meeting the world oil demands where as other blame the developing countries like India and China for create a demand-supply imbalance. But back home, in India, the issue has several facets. For a country like India, which imports 90% of its oil requirement, the imbalances in the world oil market are something that needs to be looked into very seriously. But given the fact that the regulations and business structure of the oil industry in India is so complicated, the need for looking into international oil imbalances seems a lesser priority to me.

One most important thing that we need to look into first is myopic vision and negligence on part of Government as well as the oil companies. On one side the government tries to woo the common man with subsidized energy items and on the other side it’s not ready to revise its excise and sales duty rules. Myopic vision of the government is on display every time we see a sharp price hike in India. Our government notices the international oil markets only when there is a sharp rise in the oil prices and by that time it’s too late. May be that’s a politically wise decision, cause now you can blame the international oil prices for the hike in domestic prices.

And myopic vision of the oil companies is exhibited through their cries claming being in loss, every time oil prices in international markets move north-wards.

LPG and Kerosene is highly subsidized in India because common man uses it everyday. It’s a good rule as long as we all stick to the rule. But in India, no one does stick to the rule. Hotel owners, caterers and LPG vehicle owners use the 14Kg LPG cylinders (which is meant only for the home usage) bluntly flouting the norms. In most of the rural parts of India, Kerosene is an alternate to diesel (Kerosene is subsidized only for the home usage). Diesel, as per the government is subsidized because it’s used by the most of the middle class into the transportation businesses. But these days diesel is used for power generation by everyone (households and business houses alike), beyond the allowed limits. These illegal activities disturb the demand supply equation causing a spurt in demand in a short period of time. Government’s calculations of the subsidy are based on the average usage of LP/Kerosene by a household. These averages are standard and only figure that can change these calculations is the population. Based on these figures government promises a subsidy figure to the oil companies. Oil companies then subtract this subsidy from their target price and thus a price of oil is decided. In real life the most subsidized energy items are sold the most, much more than the government’s expectations and then government is not in a position to pay the promised subsidies to the oil companies. These things are happening years after years and neither government not the PSU authorities are willing to look into the matter. The PSE authorities wake up only after looking at their quarterly balance sheets. When they realize that they are into a mess, they start running from minister to minister to some sanctions bestowed to them. For last few years government accumulated all this mess by issuing “Oil Bonds” (Oil Bonds is a pathetic trick found by someone to postpone the expenses in future. May be, I will talk about it in another article) and when things started going out of control government hiked the prices of all energy items blaming the international oil prices.

I do agree that there is an international imbalance in the demand-supply of oil, but I also believe that if India gets it domestic demand-supply straightened and all its subsidy programs restructured, we all can see cheaper oil in India too. Oil companies should strictly sell the LPG(14kg)/Kerosene (subsidized) only to the households and they should also make sure that the usage of diesel for power generation is not beyond the allowed limit. These two initiatives will ease the demand pressure to some extent. Its said – “Its never too late”.