Petrol prices were deregulated in June 2010 and linked to international crude prices, making them market-determined. However, since June, international crude prices have increased from roughly $75 a barrel to nearly $100 a barrel, resulting in rising retail petrol prices.
The last two price increases indicate firming up of crude prices internationally, a product of global economic recovery. Before international oil prices collapsed along with the financial system in the second half of 2008, crude prices had touched $147 a barrel. Now with renewed global recovery in economic growth, worldwide demand for oil is again increasing, raising international prices.
So, is there any respite?
Respite can come from three quarters - from a fall in demand, from increased supplies and from changes in the way oil is priced domestically.
Demand for energy from oil is the maximum from the transportation sector, accounting for 55% of oil used worldwide. Now, take car sales. In 2010, passenger car sales increased by 32% while commercial vehicle sales increased by 34% over 2009 in India. In the US, car sales increased 13% in 2010 over 2009. As more cars hit the roads, demand for oil only increases.
But as oil prices increase, people tend to cut back on consumption levels, for example, by driving less. The higher the price, the greater the tendency to cut back consumption. Nevertheless, due to rising prices even if demand moderates, aggregate demand is likely to scale newer peaks in 2011.
Next comes supply. After demand crashed in 2008 and 2009, oil-producing countries were quick to decrease extraction and supply. They are yet to ramp up production. Although they promised to do so on January 24, which should moderate international crude prices, beyond a certain level, supply adjustments to demand become difficult. On the back of sustained demand, there is a peak level of production possible. This is called the 'peak oil' theory. Until then, prices rise. Only after the peak is reached does the price rise trigger a fall in consumption to the level of available supply.
In conclusion, we can expect greater supplies in 2011 that should moderate prices, but these efforts will merely slow the rise in international crude prices.
Retail price of petrol also depends, significantly, on government-imposed taxes and levies.
The retail price minus all taxes is actually less than what oil marketing companies (OMCs) pay to buy, refine, transport and sell oil. The difference or loss to the OMCs, popularly called 'under recoveries', is the subsidy burden, made up (partially) by issuance of oil bonds by the Centre.
Customs duty, levied by the central government, is 5% on crude oil and 7.5% on petrol and diesel. It also levies excise duty of Rs 14.35 per litre on petrol, comprising nearly 25% of what we pay. The excise duty on diesel is Rs 4.60 a litre.
Almost 40% of the Centre's indirect tax revenue comes from the petroleum sector. Tax revenue from fuels has been three to four times the subsidy which the government had paid on them in three of the last four years. The state governments also impose sales and value added taxes. Sales tax varies from 18% in Orissa to 33% in Andhra Pradesh. There is an urgent need to rationalise and harmonise state-level taxes and levies.
The central government can substantially reduce the burden on the common man by slashing excise duty on petrol by Rs 5-6 per litre. Similarly, scrapping customs duty on crude will help. Together it can reduce petrol prices to Rs 50 per litre. This can be done in the next Union Budget. Deregulation of petrol prices removed the subsidy element to OMCs. This can be used to cut taxes on petrol.
In the long run, diesel price deregulation is inevitable, especially if the huge differential in retail prices between petrol and diesel remains. It encourages greater diesel consumption through higher sales of diesel-run vehicles which pollute more. Worldwide, this price differential does not exist. By reducing taxes on petrol and thereby reducing retail prices, the incentive for greater diesel consumption will reduce, thus helping manage the diesel subsidy bill.
As for kerosene, according to oil ministry estimates, more than 10 million tonnes of kerosene go for sale through ration shops every year, but 40% or more is siphoned off by "organised gangs of mafia proportion", who also smuggle it into neighbouring Pakistan, Sri Lanka, Nepal and Bangladesh where it fetches double the price. The illegal market is more than Rs 10,000 crore every year.
The government should effect several small price increases for kerosene and LPG, aligning them with the market rates. Kerosene and cooking gas subsidies end up benefiting semi-urban and urban consumers more (respectively), rather than the rural poor. Fuel consumption patterns in rural areas still show heavy reliance on biomass.
The last two price increases indicate firming up of crude prices internationally, a product of global economic recovery. Before international oil prices collapsed along with the financial system in the second half of 2008, crude prices had touched $147 a barrel. Now with renewed global recovery in economic growth, worldwide demand for oil is again increasing, raising international prices.
So, is there any respite?
Respite can come from three quarters - from a fall in demand, from increased supplies and from changes in the way oil is priced domestically.
Demand for energy from oil is the maximum from the transportation sector, accounting for 55% of oil used worldwide. Now, take car sales. In 2010, passenger car sales increased by 32% while commercial vehicle sales increased by 34% over 2009 in India. In the US, car sales increased 13% in 2010 over 2009. As more cars hit the roads, demand for oil only increases.
But as oil prices increase, people tend to cut back on consumption levels, for example, by driving less. The higher the price, the greater the tendency to cut back consumption. Nevertheless, due to rising prices even if demand moderates, aggregate demand is likely to scale newer peaks in 2011.
Next comes supply. After demand crashed in 2008 and 2009, oil-producing countries were quick to decrease extraction and supply. They are yet to ramp up production. Although they promised to do so on January 24, which should moderate international crude prices, beyond a certain level, supply adjustments to demand become difficult. On the back of sustained demand, there is a peak level of production possible. This is called the 'peak oil' theory. Until then, prices rise. Only after the peak is reached does the price rise trigger a fall in consumption to the level of available supply.
In conclusion, we can expect greater supplies in 2011 that should moderate prices, but these efforts will merely slow the rise in international crude prices.
Retail price of petrol also depends, significantly, on government-imposed taxes and levies.
The retail price minus all taxes is actually less than what oil marketing companies (OMCs) pay to buy, refine, transport and sell oil. The difference or loss to the OMCs, popularly called 'under recoveries', is the subsidy burden, made up (partially) by issuance of oil bonds by the Centre.
Customs duty, levied by the central government, is 5% on crude oil and 7.5% on petrol and diesel. It also levies excise duty of Rs 14.35 per litre on petrol, comprising nearly 25% of what we pay. The excise duty on diesel is Rs 4.60 a litre.
Almost 40% of the Centre's indirect tax revenue comes from the petroleum sector. Tax revenue from fuels has been three to four times the subsidy which the government had paid on them in three of the last four years. The state governments also impose sales and value added taxes. Sales tax varies from 18% in Orissa to 33% in Andhra Pradesh. There is an urgent need to rationalise and harmonise state-level taxes and levies.
The central government can substantially reduce the burden on the common man by slashing excise duty on petrol by Rs 5-6 per litre. Similarly, scrapping customs duty on crude will help. Together it can reduce petrol prices to Rs 50 per litre. This can be done in the next Union Budget. Deregulation of petrol prices removed the subsidy element to OMCs. This can be used to cut taxes on petrol.
In the long run, diesel price deregulation is inevitable, especially if the huge differential in retail prices between petrol and diesel remains. It encourages greater diesel consumption through higher sales of diesel-run vehicles which pollute more. Worldwide, this price differential does not exist. By reducing taxes on petrol and thereby reducing retail prices, the incentive for greater diesel consumption will reduce, thus helping manage the diesel subsidy bill.
As for kerosene, according to oil ministry estimates, more than 10 million tonnes of kerosene go for sale through ration shops every year, but 40% or more is siphoned off by "organised gangs of mafia proportion", who also smuggle it into neighbouring Pakistan, Sri Lanka, Nepal and Bangladesh where it fetches double the price. The illegal market is more than Rs 10,000 crore every year.
The government should effect several small price increases for kerosene and LPG, aligning them with the market rates. Kerosene and cooking gas subsidies end up benefiting semi-urban and urban consumers more (respectively), rather than the rural poor. Fuel consumption patterns in rural areas still show heavy reliance on biomass.
Besides reducing subsidies, it can also save the likes of Yeshwant Sonawane!
- Dilip Modi. (in TOI - OPINION, dated feb 8)
Dilip Modi is President of Assocham.
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