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No soft options to stem the barrelling oil crisis
May, 28th 2008

The same old package of reduction in taxes and duties, issuance of oil bonds and higher subsidy sharing by the upstream oil companies will not work this time around. Only increasing the retail prices of petroleum products will.

The Governments options are fast running out with every passing day of rising oil prices. Sooner than later, it will have to bow to the market and increase retail prices of petroleum products especially that of transportation fuels. The last time that retail prices were tinkered with was in February, when global oil prices were at $95 a barrel. Today, oil trades at $133 a barrel. Surely, retail prices fixed then cannot hold now after crude oil prices have risen 40 per cent.

That the Petroleum Minister, Mr Murli Deora, has already met the Prime Minister, Dr Manmohan Singh, twice in two days tells the tale. But sadly, despite these meetings at the highest level what we now hear is more of the same when it comes to options before the Government to handle the crisis.

It is the same old package of reduction in taxes and duties, issuance of oil bonds and higher subsidy sharing by the upstream oil companies, Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL). The option of increasing the retail price seems to be the least favoured one, but economically speaking it should rank at the top of the weaponry to combat the crisis.

Options other than an increase in retail price may have worked when oil was at sub-$100 a barrel. Indeed, successive governments have employed options such as oil bonds successfully at many stages of the journey of oil prices from around $30 a barrel in the early part of this decade, to now. But those options may not work in the current context given the unbelievably large disconnect between what should be the prices of products such as petrol, diesel, cooking gas and kerosene and what they actually are now (see tables).

Let us examine each of the options that the Government is considering now to see why there may not be an alternative to increasing retail prices.

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