Why the price of petrol and diesel should be further increased
Well now most of you might be thinking has this guy gone nuts!!! Why would any sane person on this planet want the price of a commodity like petrol to increase? Petrol has become an essential part of our everyday life, has its cost not already increased to an unbearable level. But let us delve into this a little bit further. Now why exactly has the price of petrol increased? Is not the price of petrol decided by the government? And why would the UPA want to increase the price of petrol in an election year and that too when inflation is already touching new highs almost every coming week. And it’s common knowledge that inflation has brought down a many strong Indian Governments in the past. One possible reason if you are still unaware of it is that we in India don’t produce a lot of Oil like the Gulf Countries. To be more precise we buy more than 70% of our oil from foreign countries, mostly OPEC members like Saudi Arabia, UAE etc.
OPEC stands for Organization of Petroleum Exporting Countries, and for those of you who have heard the name OPEC for the very first time, it is simply a cartel of Oil producing countries led by Saudi Arabia whose sole purpose is to always keep the price of Oil artificially high by maintaining scarcity of Oil. Oil hit a record $145/barrel last week, up from $51/barrel in January 2007. Taking a longer four-year perspective, the price of the crude is up 250%, but Indian petrol is up only 35%, diesel 46%, and kerosene not at all! Why not? Because government diktat obliges oil marketing companies to provide massive implicit subsidies to consumers that may touch a staggering Rs 200,000 crore this year.
Subsiding oil consumers — most of whom are middle class or rich — makes no sense in a poor country like ours. Most people in India live on less than Rs 20/day. But the implicit petrol subsidy for many car-owners exceeds Rs 100/day. This offends both social justice and economic sense. Many politicians say a price freeze on transport fuels will protect the poor from inflation. In fact, it protects mainly car-owners. Higher fuel prices will push up transport costs and hence, overall prices a bit, but so will the deficit financing used to subsidize oil. So what we have in reality is a socialist government protecting the interest of car owners rather than say providing food to malnourished children. Now since we buy almost all our Oil, somebody has to foot the bills for the ever dearer Oil that we keep on buying. So then who makes up for the difference in price that we pay and what it actually costs. The Oil companies of course which are government owned. And where does the government get this money from, from taxpaying citizens like us off course.
And if you are thinking about the couple of thousand rupees that you might have paid as income tax then think again, are you not forgetting about something else? Remember the last time you went to a hotel, do you remember the 12.5 % service tax that you had to shell out, or the last time you bought an everyday common thing like tooth paste, you had to pay sales tax on that too, even if you are one of those persons who don’t pay income tax, you are paying a large amount of hidden taxes for each and everything that you buy, to the government. It is this money, your hard earned money that the government uses to subsidize the price of petrol. So instead of utilizing the tax money for better things like building Schools, Roads, providing clean drinking water or providing electricity, this money is rather used to subsidize the rich car owner in the name of subsidizing the poor. This is the crux of our entire problem.
Even though the price of petrol is going up the roof, this price is not being passed on to consumers and the end result is that we have in our country the number of people buying luxury cars going through the roof, and what makes this problem worse is that even though the number of cars on the roads are increasing at a frantic rate we are fast running out of roads for these cars to run on. If you have ever been in a traffic jam you know what I am trying to say. So in India we have an increase in the demand of petrol, it has actually risen by 7 percent this year the fastest in 8 years and that too when the price of Oil is making records almost every other day. The refusal to pass on this actual price of petrol to consumers is keeping demand artificially high. And it’s the Oil producing countries that are making merry at our expense, the oil subsidy is in reality a subsidy for these Oil producing OPEC countries and not for consumers like us. They just keep on increasing the price of oil and our government just keeps on paying it to them out of our very own pockets in the name of subsidizing Petrol. Just imagine all our hard earned tax money going into the pockets of gulf countries instead of being used for providing us with basic services like roads or education to our still vast illiterate population.
Now that we have some idea of the complicated problem of petrol pricing, is there any way to solve this problem of ever increasing price of Oil. Yes there is one! and a pretty simple and easy to implement one. But this solution even though it is the only one is fraught with political consequences for the government. And only a government with some spine and genuinely wanting the good of the entire nation can go forward with it. The solution is simply to increase the price of petrol so that the consumers pay the real price for petrol, the price that it actually costs in the international markets. This is the only way demand for petrol can be brought down. Otherwise we will still keep on having rich people wasting petrol for their little comforts and the common man paying for it. Just consider an example of a typical upper class family of 4, 2 parents and one daughter and son. Each member of the family drives his or her own personal petrol guzzling SUV.
Assuming that on an average each car enjoys a subsidy of Rs 100 per day, for 4 cars that comes out to Rs 400/day. And considering the fact that a large many of our population still live on less than Rs 20/day. We can either provide a subsidy of Rs 400 to an affluent family who in any case can live without it or we can directly give it to the poor families in our villages through schemes like the National Rural Employment Guarantee Scheme where it would support 20 families!!! As you can understand by now there is not just economic logic in increasing the price of petrol but a social imperative to do so in a country like ours where farmers still kill themselves out of desperation, a country where thousands of children still die due to lack of proper food in our villages, a country where people have to fight for a thing as basic as drinking water in our towns. All this happens just so that we can pay a little less for our petrol. Is this a bad idea after all? Record economic growth has provided the government with additional tax revenue of Rs 120,000 crore per year. This must be used to build infrastructure and directly target the poor. The government spends a mere Rs 16,000 crore on its flagship employment guarantee programme and Rs 200,000 crore on oil subsidies. There is no greater crime than this.
If we are able to follow this difficult path of passing on the actual price of petrol to the consumers going forward, we would be successful in decreasing the demand for petrol in the long term and this would eventually lead to a fall in Global Crude Prices and also ensure less suffering for our masses. The sooner we realize this simple and basic fact and take action the better it would be for all of us. Running away from reality is not going to solve any problems it is bound to catch up with us someday.
Technorati Tags: India,Oil,OPEC,Petrol,Petrol price,Subsidy
July 7th, 2008 at 6:26 am
oh but high prices sucks!!! with that much high price i had to run my bike on……!?
July 7th, 2008 at 7:57 am
I don’t entirely agree with the conclusions drawn herein. For one, increasing the price of petrol/ diesel will only proportionately increase the prices of other essential commodities.
Which would mean that if the government is subsidizing petrol to the extent of, say 50%, then removal of this subsidy would mean that the prices of all other commodities would go up prorportionate to the extent of fuel used. For instance, food prices would increase drastically because transporters would have to factor in the 50% rise in fuel prices. And this would impact manufacturing as well, meaning costs (fuel being a huge cost) would go up for manufacture of products, and hence the sale price would increase and sales taxes would also increase.
Which would mean that though the government would not be subsidizing petrol/ diesel, it may have to end up subsidizing all other essential commodities, which may actually end up as a higher bill in the government’s books and hence, more taxes would be spent on subsidy instead of infrastructure/ education etc.
This will increase inflation to levels witnessed in China in the 90’s, leading to an overall increase in prices all around. The question is not just one of the poor subsidizing the rich, its a question of overall economic stability. Increase in fuel prices will actually impact the poor more than it will impact the rich.
Increasing prices therefore, would be no solution. The solution lies at the international level, wherein the Government should lobby for a cap on prices of fuel purchased from OPEC and other oil producing countries, or step into the oil-futures market to block fuel for the future at current prices.
July 7th, 2008 at 3:04 pm
I live in US and from my knowledge, I can tell that $145 a barrel is putting a huge downward spiral on the economy that is the feed engine for the rest of the world. Honestly, the liberals and environmentalists have banned every effort to drill more oil off-shore and in the Alaskan tundra. It’s estimated that US can produce enough oil for its own demand for next 60 years without purchasing a droplet from Canada or OPEC.
The hidden devastation of oil price lies in the inflation of everything from shingles to build a house to the food that we need. World needs politicians who can stand up for the principles and not for their own selfishness.
Sadly, There is no Mahatma to save this world from this impending disaster.
Shilpan
July 7th, 2008 at 4:41 pm
your suggestion is to simply do nothing and wait around for the mercy of OPEC countries to bring down the price of Oil, this idea of “cap on prices of fuel” given by our finance minister Mr. Chidambaran is just a fantasy, do you genuinely believe that when even the world’s only superpower America is unable to make the OPEC countries bring down the price of a petrol, a country like India with almost no clout in International Affairs could accomplish something like that? And you also forget that high prices are in the interest of OPEC countries, why would they ever want it to come down. And regarding your second suggestion of Futures trading which was recently proposed by the renowned TOI columnist Mr Swaminathan even he is in favor of completely removing oil subsidies and even he proposed the future trading only as a last resort. Oil futures were trading at $145 the previous week, even if we hedge against price rise by buying futures, the price of futures just like the price of actual oil is only going to keep on increasing, and given the fact that the price for consumers is never increased, the oil subsidy is just bound to keep on increasing. How long do you think a price rise will be delayed? We can’t keep on doing this forever in the face of ever increasing global prices, we will have to increase it someday, better now then on some future date when it’s already too little too late.
Even going by your example of a 50% subsidy you are correct in saying that prices of essential commodities will increase. But this would only be a temporary phenomenon. Why so, because you forget that price of Oil like any other commodity is determined by the forces of demand and supply. A 50 % increase in the price of petrol would also mean a major reduction in demand. This would happen because people would shift from using petrol guzzling SUV’s to much more fuel efficient vehicles as is already happening in USA where there is no Oil subsidy. People will cut down on all unnecessary petrol usage thus reducing the demand for oil. In the USA as a result of all this oil demand has already come down and this is having a major calming effect on the price of oil. The price of Oil would only come down if we see a similar decrease in oil demand in India also, which is the largest oil consumer in the world after US and China. The only reason the Indian government has been able to keep the price of petrol at current levels is because of the 8% + economic growth that we have had in the past few years. The combined Central and State Fiscal Deficit has already reached an alarming level of 10%. If we keep on continuing down this economically and socially unviable path of Oil subsidies leave alone subsidized petrol we won’t even have any money left to buy Oil in a year’s time.
July 7th, 2008 at 5:15 pm
I would just like to remind you that one of the main reasons for the high food prices that you mentioned is that one of the largest food exporting countries Australia is in the fifth year of a record drought. This phenomenon like many other Cliamte changes happening around the world are responsible for a lot many of our problems. You can never be sure what could happen if we keep on playing around with the environment as we have been recklessly doing in the past. Oil drilling in Off shore and Alaska region has been banned for this very reason. There are far more worse things possible than a little increase in the price of petrol. Just imagine what would you do if the place you live in suffers a drought like the one in Australia, in such a situation even drinking water could become much more expensive then the current price of petrol. So be careful about what you wish for, it might just come true.
July 7th, 2008 at 5:29 pm
http://www.guardian.co.uk/world/2006/nov/08/australia.drought
July 7th, 2008 at 5:32 pm
July 8th, 2008 at 1:04 am
Graison,
The whole prices of the oil is going up purely based on speculation. There is no shortage of oil by itself. After the election in the US, we should see some correction in the oil market. Hitting $100 per barrel was a milestone not long ago that looked hard to reach. Now, $100 per barrel looks so cheap. It is only speculation.
Ramesh
The Geek Stuff
July 8th, 2008 at 4:43 am
There might be some truth in what you are saying about speculation, but till date this accusation has not been supported by any concrete facts, up until now the only report of any substance that has come out is the one by a US Congressional Sub-committee, and the figures it has come out are that investments by pension funds, sovereign wealth funds and endowment funds in commodity futures increased from $13 billion at the end of 2003 to $260 billion in March 2008. This is a really large increase, but this does not in any way mean that speculation has increased, what it simply means is that more and more countries are now hedging against a future price rise by buying in the futures market, and for the futures market to accommodate such a large increase in buyers there has to be a corresponding increase in investments by non-buyers like pension funds, sovereign wealth funds etc.
Even if there is speculation can you be sure out of the current price of $140 how much is due to speculation? By the end of next year prices could go below $100 or they could go above $200, both scenarios are equally likely. The only viable way ahead is to pass on the price of petrol to the consumers, we can no longer have our economy dancing to the tunes of Oil prices in the International Markets. Increasing prices is a difficult thing to do but it is the only way our economy is going to survive this onslaught led by Oil Prices. By maintaining the status quo and doing nothing we would be giving away all the economic gains that we made in the last few years, all in the name of petrol prices.
July 8th, 2008 at 12:28 pm
Check out the size of your post dude… better use a more tag.
July 8th, 2008 at 2:09 pm
July 21st, 2008 at 6:54 am
I am not able to understand why the crude price has gone up from 55 dollars to 145 dollars within a year. Surely it cannot be due to demand supply economics. The demand could not have gone up so unusually.
I think the best way for the govt is to get out of this business and let the market forces decide the price. In the short run there may be problems. But in the long run things will correct themselves.
Already it appears that more funds will now be available for alternate energy. Actually the rise may be a blessing in disguise.
Can somebody tell me the cost of petrol, diiesel,LPG and kerosene at current crude prices.
August 6th, 2008 at 10:06 am
I totally agree with Graison’s logic of leaving the price of the petrol to be dictated by market rather than providing the subsidy and this one I’m saying only for petrol and not for diesel which is the backbone of mass transportation.
Diesel should be provided some subsidy and not petrol as petrol in India is not being used for mass transportation.
Yes we are unnecessarily encouraging Rich and upper middle class people to enjoy at the expense of the rest of the poor in India.
Social justice has to prevail and we cannot afford to become a capitalistic state like USA.
September 23rd, 2008 at 12:50 pm
First, Lets forget about the poor feeding the rich by the way of subsidy because, the percentage of poor people as compared to the Rich people is very High. There are more poor people living in India as compared to the Rich People. I do not have the statistics to mention here but am dam sure the poor and middle class are more as compared to the rich in india. So the poor feeding the Rich and subsidizing Rs.400 to the rich family is totally non agreeable. In fact such rich people are no one else other than the politician family members in India. Each family member of a politician uses a car for transportation. They never worry about the cost of petrol or diesel since they are anyway not going to pay for that and its only the government pays for them irrespective of whether it is subsidized or not.
Increasing the price of fuel in India will only lead to more problems since the cost of the daily commodities will go up. To reduce subsidy the govt must take the following corrective actions.
1) The benefits paid to the employees of the oil companies are so huge that the employees need not even touch the basic salary of them every month. The travel allowance paid to an employee is roughly around Rs.40000/- per month to some category of employees where he never utilizes that money and travels only by train. just imagine the other salary components like Basic Salary and other allowances. Apart from the travel allowance each employee of the Oil company can refill their vehicles free of cost which is again at a common man’s cost. Other benefits like providing free education to the children of the oil companies. Why should all these benefits be provided to the employees of the oil companies? Are they working so hard like our Army friends? where actual benefits to our Army friends are only 1/10th of what being paid to the oil company employees.
2) Why people are looking for more luxury SUVs and Cars is because they are looking for more comfort. Do we have or can provide that comfort in the public transportation? Look at the old buses and trains running which are almost 15 to 20 years old. Look at the worst roads in india which is again leading to more maintenance to the public and private vehicles.
3) Subsidy should be given to Petrol and Diesel to avoid the poor committing suicide. If the poor cannot afford to buy the commodities at the rising prices obviously more people have already started committing suicide. We need to stop this from happening. Let the price of the oil come down which would eventually have an impact in the country’s growth.
Only if the price of the oil comes down the entire world can live peacefully otherwise we all will cannot live peacefully.
October 28th, 2008 at 6:56 pm
Well written article.