by R. Sasankan

Motorists in India may have good reason to feel deeply miffed.

Their summer of discontent began early this year when simmering tensions in the Gulf boiled over into a full-scale war between the US and Iran sparking a mercurial rise in global crude oil prices.

The benchmark Brent crude oil price surged by more than 55 per cent from around $ 72 per barrel before the war to roughly $ 120 per barrel. State-run fuel retailers started cranking up prices at the pump about two and a half months after the Iran war broke out. As a result, prices of petrol and diesel jumped by approximately Rs 7.50 per litre after a rash of price revisions since May 15.

The price revisions were designed to ease the burden of losses that the retailers suffered after the government stopped them from raising fuel prices in tandem with the crude oil price surge.

The government directed to the retailers to hold off on the price increase because of political compulsions stemming from Assembly elections in four states and one union territory. India imports close to 90 per cent of its crude requirements. So, the restraint on fuel retailers meant that they were unable to pass on the rising costs to consumers.

But now there is a glimmer of hope that the war will end soon. US and Iranian negotiators recently signed a framework agreement to end the hostilities and reopen the Strait of Hormuz through which almost 25% of the world's seaborne oil trade passes. The two sides have a 60-day window to hammer out the specifics of the agreement that will hopefully bring lasting peace to the troubled region.

The return to diplomacy after four months of fiery fulminations from both sides has brought sanity to the markets. The Brent crude price recently tumbled below $ 70 a barrel before nudging slightly above that threshold. The crude oil price today has returned to the level before the war. According to official data, the average price of the Indian crude basket stood at $68.86 per barrel on June 27. This is the first time that it has dipped below $70 since the Iran-Israel conflict triggered a spike in global oil prices.

This begs the obvious question: when will we see fuel prices at the pump fall significantly?

There is a growing angst among motorists over the fact that petrol and diesel prices in India do not rise and fall in sync with global crude prices. The state-run retailers have been loath to pass on the benefits of crude price reductions on the ground that they have not been able to fully recoup their "under recoveries".

It is hard to pierce the fog of statistics that clouds petroleum pricing in India. This opacity is the result of a time-worn practice where successive governments have chosen to calibrate petroleum prices based on prudence and electoral exigencies.

In one sense, this is at odds with the decision to dismantle the administered price mechanism (APM) in April 2002. The APM gave the government the right to fix prices for petroleum products. The transition to an era of price deregulation was, however, slow and long drawn: petrol pricing was deregulated in June 2010 and diesel in October 2014.

Since June 2017, the OMCs are expected to review and revise retail fuel prices on a daily basis based on a 15-day rolling average of international benchmark prices.

But the market-determined pricing regime has never worked in a manner where the oil retailers were given a complete free hand. Pricing decisions are sensitive and the government has been able to nudge the state-run companies to operate within a limited area of freedom.

The ruling party usually decides the politically convenient date to raise domestic retail prices. As a result, the oil marketing companies often suffer losses when they are prevented from recovering costs.

There is another fly in the ointment. When global crude prices sharply fell between 2014 and 2016, the government chose not to fully pass on the retail benefits to the consumer. Instead, it aggressively increased Central Excise Duties and State Value Added Tax (VAT) to bolster fiscal revenues. This created an "asymmetric" pricing structure: when crude prices rose, retail costs went up. But when crude oil prices dipped, retail prices rarely decreased as taxes were used to prop up government revenues.

With no sign of a rollback in pump prices after the slide in crude oil prices, motorists are naturally upset that they are being denied the benefits of a downside.

The claim that the oil retailing prices have suffered losses over the past four and a half years when they did not raise pump prices is at best specious. If memory serves me right, for about four years prior to the start of the Iran war, domestic prices were pegged to crude at around
$ 110 a barrel even though crude had moved down to around 55-60% of that level.

Moreover, these companies benefited enormously from the price discounts on Russian crude. I do not know how these surplus collections from the consumers were accounted for and who really profiteered. Crude price rose above this level only marginally and stayed at those levels for only a short period.

The consumer has to contend with far too many arbitrary taxes levied by the Central and State levels - another key reason why petroleum products ought to be brought within the ambit of the Goods and Service Tax (GST) regime. The lack of consensus over this measure means that motorists will continue to moan over the inequities of the petroleum pricing regime.

This leads to a piquant situation where Indian consumers are denied modern commercial energy at reasonable prices. We are in effect restricting productivity and economic growth.

To make matters worse, the government has now declared its intention to ramp up ethanol doping of petrol without first determining whether vehicles are equipped to deal with the change. Anecdotal stories indicate that mileage suffers when ethanol doping rises from 10% at present to the proposed 20%. And there is talk of raising it higher in order to tamp down on crude imports. The subsidy on Green Hydrogen is another questionable policy.

Government ownership of the oil and gas sector makes matters worse. The government manipulates these companies to raise extra budgetary resources and gives benefits to preferred private players. This is done through myriad ways such as ad hoc taxes, extraordinary dividends, cross subsidies, multiple prices for the same product depending on the origin (as in the case of natural gas), deemed exports, exact sharing of opaque discounts as in the case of Russian imports.

In substance, this perpetuates a pernicious practice of privatizing profits and socializing costs! Most importantly, this restricts competitive energy markets, reduces consumption and negatively impacts economic growth, apart from benefitting select private players.

This is the real reason why India's primary energy consumption per capita remains at sub-Saharan levels and encourages massive corruption within the sector.

Unless we allow market-based competitive pricing of oil and gas, we will never know how much the consumer is actually paying and to whom. Officially, we deregulated pricing of petroleum products many years ago. In practice, prices are still fixed to benefit deeply vested interests.