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Living with higher oil prices

With international oil prices rising sharply in the last two weeks and continuing to rule high, there was a sense of inevitability about a rise in the domestic prices of petroleum products. Petrol and diesel prices were last raised when the international benchmark Brent crude was at $50 a barrel, but it now rules at $65, having crossed $67 briefly. To maintain the profitability of the oil companies, the increase required per litre of petrol was estimated at between Rs.5 and Rs.7.50, and for diesel between Rs.4 and Rs.5.15. In the circumstances, the increase effected by the Centre — of Rs.3 a litre for petrol and Rs.2 for diesel — does seem moderate from the standpoint of the consumers even as it does not compensate the oil companies fully for the rise in international prices. Given the obvious inflationary impact and the political sensitivity, governments have refrained from passing the burden of higher international prices down fully (even after the administered price mechanism was dismantled in 2002). The high rates of customs and excise duties on petroleum products did provide a cushion in the past, and could be reduced to moderate the final prices. Such indeed was the course suggested by the Communist Party of India (Marxist) to Prime Minister Manmohan Singh — forgoing the increases in customs and excise duties, withdrawing the exemption for exports of petroleum products from refineries, suspending the road cess increase, and collecting tax dues, among other measures.

Having reduced excise and customs duties by Rs.4200 crore last year to avoid large price increases, and needing to find resources for new programmes, the Union Government did not consider it prudent to forgo excise or customs revenue any further. Also, with the profitability of oil companies eroded, the Government stands to lose revenue by way of income tax collections as well. One measure that can help in moderating the final prices is a cut in sales taxes levied by the States — they range from 20 per cent in Delhi to 30 per cent in Mumbai and Chennai for petrol, and from 12 per cent in Delhi to 34 per cent in Mumbai for diesel. Strapped as they are for resources, the States have hardly ever countenanced such a suggestion. Unlike some of the earlier oil price shocks, the increase this time flows not from supply reductions but from growing demand — according to the International Monetary Fund, the present international demand for oil is the strongest in 24 years. Growing demand from the United States, China, and India are said to be behind this surge, and oil prices have probably climbed on to a new $60-plus plateau. In this difficult situation, new gas finds offshore do provide a glimmer of hope but, for the long term, the solution lies in pushing for alternative energy sources including nuclear, wind, and solar energy. One consolation is that many of the alternative sources that were earlier more expensive will now be rendered viable by the high oil prices.

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