Fuel price control is back from the dead

The specter of political control haunts India again Gasoline retailers and those who financed them, eroding the profits of oil companies, hurting private operators in particular Dependence and nayara energy (Nayara is the name Essar Oil’s former Russian owners gave their acquisition.)

Reliance Industries Ltd’s fuel retailers are facing a fuel shortage and fear a return to the 2008 scenario where many private sector fuel retailers had to close their operations as global crude prices soared and the government of turn decided to restrict fuel subsidy to state oil marketing companies (OMC). That meant fuel was significantly cheaper at Indian Oil, Bharat Petroleum and Hindustan Petroleum outlets, compared to Reliance and Essar outlets, where fuel was offered at unsubsidized market-linked prices. Indians, being rational consumers, preferred to buy fuel at subsidized outlets, avoiding gas stations with market-linked prices.

State-owned oil trading companies (OMCs) did not raise retail prices from November 2021 until after the results of crucial assembly elections were announced on March 10 this year, although crude oil prices rose 37 percent. .5% during this period. Assembly elections matter to politicians, not oil companies. However, the state-owned OMCs maintained their prices and suffered losses in their retail operations. Since the state-owned OMCs kept their prices, Reliance and Nayara had to do the same.

After the election results were released, the state-owned OMCs raised the price of diesel for bulk buyers by $24 per litre, while retail prices rise in dibs and dabs. Bulk buyers are state-owned transportation corporations and telecom operators who deploy backup diesel generators to keep their base stations running, when grid power goes out (which is why telecom lines keep buzzing even during outages). of energy).

Acting rationally, Indian bulk diesel buyers are buying their requirement at retail outlets, defeating the double pricing ploy. Refineries face the prospect of continuing to make losses: the higher the throughput through retail sales, the greater the relative losses they suffer. They also choose to be rational and restrict sales, particularly private OMCs, which are accountable to their profit-focused investors.

Politically dictated price controls were supposed to have ended in the petroleum fuel sector more than seven years ago. Jet fuel (Aviation Turbine Fuel or ATF) spiraled out of control in 2002, gasoline prices in 2010, and diesel prices were set on a course to reach market price parity by allowing oil companies to will increase by 50 paise each month. Such parity was reached in October 2014, just five months after the United Progressive Alliance (UPA) government, which had implemented this policy, lost the general elections and the BJP government took office after promising, among many other reforms, the political approach of minimum-government, maximum-governance. After that, only kerosene and cooking gas were supposed to be subsidized, and even these subsidies have been gradually reduced.

However, as crucial assembly elections approached in early 2022, state-owned OMCs ‘voluntarily’ relinquished their freedom to trade and kept gasoline and diesel prices stable, regardless of crude price volatility. Worldwide. This hurts the valuation of Bharat Petroleum Corp., scheduled for privatization.

When the rationality of the market conflicts with the rationality of the electoral battlefield, politics trumps ‘marketing freedom’.

Now private fuel retailers, faced with fuel shortages from their bulk suppliers, are bearing the brunt of price control in stealth. Private companies are accountable to their shareholders, who see no reason why it is their job to subsidize fuel prices, since taxes and subsidies are the legitimate domain of government. If they can’t get a decent return on their investment, we’d see a return of market dominance by state-owned OMCs and trouble for the banks that lent private fuel retailers to help them get set up.

Price control was supposed to be gone in 2014, but it’s back to haunt India’s oil industry. It is high time the government finds the courage to allow commercial freedom to flourish instead of sacrificing it for electoral gains.

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