The Theatrics of Oil Price Hikes

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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!

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LINKS / REFERENCES

• Implement Parikh Committee report, says CARE (The Hindu February 6, 2010)
  http://www.thehindu.com/news/national/article102226.ece 
• Ill Informed Debate on Oil De-control Act (SA Iyer, Economic Times)
  http://economictimes.indiatimes.com/opinion/columnists/swaminathan-s-a-aiyar/ill-informed-debate-on-oil-decontrol/articleshow/6108721.cms 
• How petrol price is calculated in India (11 June 2008) http://www.managementparadise.com/forums/articles/28356-how-petrol-price-calculated-india.html 
• Why do we pay so much for petrol? (Veeresh Malik, Rediff July 10, 2006) http://www.rediff.com/money/2006/jul/10price.htmv 
• Sethi, Surya P (2010): Analyzing the Parikh Committee Report on Pricing of Petroleum   (27th March 2010)