Sunday, June 26, 2011

The Theatrics of Oil Price Hikes

Yesterday, the Indian government has hiked the price of diesel, kerosene and cooking gas, and, predictably all the opposition parties, sensing public anger over rising inflation, have rushed in to demand a roll back. In response, the Ministry of Petroleum & Natural Gas has put out large advertisements in the newspapers pleading for "public support in this difficult situation".

The advertisement, titled, "Was the Increase in Prices of Petroleum Products Avoidable?" , presents the following line of argument:
  • India has to import 84% of its crude oil requirements and the international prices have gone up from US$75 (June 2010) to $ 110 per barrel.
  • Government oil companies are losing Rs.122,000 Cr (US$ 27 billion) through subsidies, of which Rs.66,000 Cr would be lost for diesel alone this year
  • Inflation is inevitable - if it were not from the price-rise, it would come from increase in fiscal deficit (higher subsidies)
What is not mentioned in the adverts is the fact that more than 50% of the retail fuel prices comes,  from taxes & duties imposed by the government. In 2008 itself, the retail price of petrol included 59% taxes, duties & commissions, and just 41% reflected the actual price of the fuel. The revenue from the sale of fuel is so important that for a number of small states, it is a critical source of budgetary revenue.

Also , it is not clear how the government is calculating the alleged loss of  $27 billion to its oil companies, given the secrecy surrounding their actual revenues from sale of petroleum by-products.

It would be interesting to know if the ongoing debate goes beyond the usual price-hike theatrics, and forces the government to come up with  numbers that  reveal more than they conceal!


  • Implement Parikh Committee report, says CARE (The Hindu February 6, 2010) 
  • Ill Informed Debate on Oil De-control Act (SA Iyer, Economic Times) 
  • How petrol price is calculated in India (11 June 2008) 
  • Why do we pay so much for petrol? (Veeresh Malik, Rediff July 10, 2006) 
  • Sethi, Surya P (2010): Analyzing the Parikh Committee Report on Pricing of Petroleum   (27th March 2010)     

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