Price freeze on high fuel prices

Price freeze on high fuel prices

Abandoning the daily price revision of petrol and diesel sets back an important reform.

The price of oil has been shooting up for weeks now, with Brent crude oil futures hitting their highest level in more than three years on Monday, at more than $75. But for two weeks now, the state-owned oil companies have kept petrol and diesel prices unchanged. Since April 24, the oil companies have abandoned the daily price revision. Since then, the prices of petrol and diesel in the national capital, for instance, are stuck at Rs. 74.63 and Rs. 65.93, respectively. This is a glaring freeze, given that since the Centre introduced the dynamic pricing mechanism in June last year allowing oil marketing companies (OMCs) to revise fuel prices daily, the retail prices of various domestic fuels had been on a steady uptrend owing to the steep rise in international crude oil prices. The price of Brent crude oil, it is worth noting, has rallied by more than 50% since June last year. Against this background, domestic fuel prices were raised to their highest level since late-2013 last month until the price freeze began on April 24. The new pricing mechanism also caused prices to show more volatility on a daily basis compared to the earlier regime when prices were revised periodically, mostly on a fortnightly basis. Further, the rise in domestic fuel prices in response to rising crude oil prices has been quite inelastic recently. Petrol and diesel prices rose by 1 to 2% in April while Brent crude rose by more than 8%. This comes as a pleasant surprise considering that domestic fuel prices, which while not falling to an equal extent when crude prices witness a sharp drop, generally keep pace with any rise in oil prices.

The retail price of petrol is a hot political subject and successive governments at the Centre are routinely held responsible for it. It is therefore speculated that the OMCs are under pressure from the government to withhold upward revisions in the days before Karnataka goes to the polls. While Union Minister Dharmendra Pradhan stated last month that the OMCs have not been instructed to refrain from raising prices, no reason for the freeze has been offered. The performance of OMC stocks in the last few weeks also suggests that the markets are not convinced. It bears repeating, in the wake of the upcoming State elections and the general election next year, that the Centre must resist the temptation to go back on its previous reforms to the fuel pricing policy. After all, it is now clear that the policy of offloading the burden of high fuel prices on consumers by transferring the burden on to the OMCs is unsustainable in the long run. The government should opt to ease the burden of fuel taxes. The best way to do this might be to bring domestic fuels under the purview of the goods and services tax. For now, there is enough room to bring down prices by reducing excise duties on oil.