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In the long term interest of the Indian economy, the principle rule and allow the prices to be regulated
Petroleum Federation of India circulated this by competition so that consumers are not
thought leadership paper on January 15, 2009 burdened unduly.
during the Petrotech-2009 international oil & gas
conference & exhibition advocating market The good times have arrived – crude oil prices
determined prices for petroleum products for have plummeted and reached a four year low.
healthy growth of the industry. Private oil companies have begun to restart the
retail operations they had closed down. Most
- Editor importantly, soon there would be a newly elected
Executive Summary
Strike when the Iron Is Hot…
A Thought Leadership Paper by Petrofed
26
government at the centre with a fresh mandate
from the public. It may not be compelled to take
populist decisions. Election manifestos will be
Over the past four years and till few months back, drafted soon; the petroleum sector and the
high crude prices caused mayhem. Economies stakeholders would like political parties to spell
were threatened and oil importing countries had out their plans on petroleum product pricing
serious cause for worry when Big Oil and oil policy.
exporting countries were rejoicing. At home,
public oil marketing companies reported losses The Integrated Energy Policy also advocates
even in the third quarter and some are expected to rationalisation of fuel prices. The policy
return losses for the fiscal on account of controlled recommends that, as a general rule, all
transport fuel prices, a paradox of purpose when commercial primary energy sources must be
world-wide profits of oil majors have jumped priced at trade parity prices at the point of sale,
several fold. The companies had borne very high namely the Free-on-Board (FOB) price for
levels of under-recoveries, and now need to products for which the country is a net exporter
regain their financial strength by avoiding making and Cost, Insurance and Freight (CIF) price for
any losses during higher crude prices scenario in which it is a net importer. The policy projects that
future. The future of marketing companies is at the price of a product for which the country is self
stake. sufficient in a competitive market with many
suppliers and buyers would fluctuate between the
At the national level, oil bonds, fertilizer bonds two depending upon the ease of import/ export
and subsidies in the two sectors weakened the and reliability of supplies. This principle, the
Government finances. Trade and fiscal balances policy claims, is extremely relevant for the
have been affected severely with high crude prices petroleum sector wherein bulk of the crude oil is
in the past four years. imported and India has become a net exporter of
petroleum products.
The consumers will continue to be burdened in
such scenarios if true competition does not set-in The policy goes further to recommend to cushion
within the Indian retail petroleum sector. domestic prices against short-term volatility of
prices on the international market (FOB or CIF)
Steps to reduce transport fuel price on December domestic prices by setting on the basis of median
6th and the temptation to further reduce them, prices over the previous month or a three month
although may appear rational in the current low period. In conclusion the policy suggests that
crude oil price scenario, are devoid of a lasting instead of administering prices, full price
solution. competition should be introduced.
Commodity markets are cyclic. Petroleum industry To start, decontrolling the prices by linking them to
is no exception to this. Crude prices may go up in Trade Parity Price for all – PSU as well as Private Oil
the future and difficult times would start again. Marketing companies – and providing subsidy to
Political compulsions will never allow the burdens needy at the consumer end, would be in line with
to be passed on deliberately. The debate over recommendation of the IEP 2006 which was
how much to pay oil companies to make up for recently approved by the Union Cabinet.
under-recoveries would never end, and as a result
oil companies would stand to lose. Why not allow For the fear of consumers getting unduly
competition to rule? Let the 'consumer pays' burdened disallowing the above actions would be