Losing the oil opportunity PDF Print E-mail
Tuesday, 11 August 2015 04:36
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With global prices so low, this is the best time to decontrol—that’s the big lesson from the Vajpayee era



The Atal Bihari Vajpayee government has frequently been praised for its bold reforms in the petroleum sector, and with good reason. At a time when most considered cutting kerosene or diesel or LPG subsidies a form of political suicide, the Vajpayee government cut subsidies dramatically. In the case of kerosene —the so-called poor man’s fuel is heavily subsidised, but the poor hardly get it—Vajpayee raised prices from Rs 2.52 per litre to Rs 9.01, or by 2.6 times more. This was done in small amounts over 33 instalments. In UPA-1, by contrast, kerosene prices were hardly raised at all. In UPA-2, kerosene prices were raised a lot more, by 62.3%, but still a small fraction of what the NDA did under Vajpayee.

What is less appreciated, though, is what made it possible for Vajpayee to cut subsidies without too much of an outcry. Since global oil prices were collapsing at that point, then finance secretary Vijay Kelkar suggested—and, to its credit, the government agreed—that petroleum prices be decontrolled. Indeed, the first several price cuts were announced to the press by the then petroleum minister Ram Naik. Later, when global oil prices started rising, local prices were also raised. But the first few hikes were probably ignored since prices were going back to where they were earlier. And by the time prices actually rose to levels beyond what they were initially, most had got used to the idea of market-pricing.


Given that global oil prices are once again very low—WTI crude prices have fallen from $98 a barrel a year ago to $44 today—this is the best time to follow the Vajpayee example. It is unfortunate that the government is losing this opportunity and, instead, has drawn up a complicated plan of direct cash transfers. There are three problems with the plan. One, since it is the states that have the list of the poor, it is they that determine the pace of cash transfers; and seeding the list of the poor with Aadhaar numbers and linking them to bank accounts is going to take time. Two, there is no reason why even the poor should get such heavily subsidised fuel. Three, there are disastrous consequences when it comes to production of these fuels as, with little profits to be made, firms simply aren’t interested in investment.

It is not clear what price petroleum minister Dharmendra Pradhan will allow firms producing natural gas to charge—a year of dithering later, he has announced a ‘premium’ will be allowed for firms operating in the deep waters. ‘Premium’, of course, is a big misnomer since this really refers to allowing market pricing. While Pradhan has not said what the ‘premium’ is going to be, sources say that firms will be allowed to charge a ‘market-price’ for some share of their production. That number, FE’s Siddharth Saikia has reported in the past (goo.gl/xp0WjX) is likely to vary from 20% to 50%. That is, firms with blocks in the most difficult regions will have to sell half their produce at the government-fixed rate and the balance at a ‘market-price’.

Whether this will help is unclear since producers are allowed to charge a ‘market-price’ for oil even today. The point is a simple one. With the bulk of India’s gas reserves located in difficult deep seas, and companies not given a market-price, they have not been investing in the last one year. So, more important than the amount of premium will be the transition to full market-pricing. Since it will take a few years to complete work anyway, firms will be willing to invest today if there is a trajectory of a few years towards market-pricing. (There is the related issue of whether this pricing will be allowed for discoveries that have not yet been operationalised—if it is not, firms may be reluctant to invest in future projects.)

But, and this is where the Modi government displays whether it is savvy or not, based on today’s prices, a 60% link to market pricing could perhaps work out to around $5, a far cry from the $8.2 per mmBtu that the Rangarajan committee was recommending a year ago—it is much lower than the $10-11 that the industry had said it needed to be able to explore for gas in the deep seas. Over a period of 2-3 years, prices could be fully market-linked.

Indeed, given how the Chinese economy is expected to slow down even further—and both Europe and Japan remain in trouble—most analysts are betting on low oil prices for the next year or so. Which is why this is the best time for the government to decontrol fuel prices, not just natural gas. As FE has pointed out earlier (goo.gl/XNWhlE), even if natural gas prices were raised as per the Rangarajan formula, natural gas would still be cheaper than LPG. At today’s prices, piped gas beats LPG by a huge margin (goo.gl/pfoI3g).

Given that market pricing of gas will also result in large investments as firms like ONGC and Reliance Industries come forward to invest billions of dollars to explore for gas, it is surprising that the government is taking so long to hike prices. The only explanation is that Rahul Gandhi’s suit-boot-ki-sarkar tag has really stung Modi. For someone who has habitually been dismissed as a no-hoper and whose party doesn’t even have enough MPs to qualify to be a Leader of the Opposition, that’s a stunning success. Of course, Gandhi wouldn’t have been a success if Modi hadn’t allowed him to change the narrative. Whether the washout in Parliament will force Modi to regain the narrative remains to be seen.

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