Comment

Former Oil and Natural Gas Commission (ONGC) chairman Subir Raha has had an insider’s view of the problems faced by the public sector oil companies. As the price of oil goes up internationally and bankrupts Indian companies, Raha says that oil subsidies have created vested interests, and that it is these groups which do not want the subsidies to be scrapped. In an interview with Parsa Venkateshwar Rao Jr, he said that international crude prices will continue to rise, and he does not think there is anything anomalous about it. The government, he feels, must bear the burden of higher price and not push it on to the public sector oil companies.

How badly are public sector oil companies affected by rising crude oil prices?
The exact figure can be provided only by the oil companies. But yes, it is a serious problem. The companies soon will not have the money to buy crude from the markets. Is it better to have diesel at a higher price or no diesel at all?

Is there a way out of the oil subsidy regime?
It is not the business of the oil companies to keep the prices down. To survive in business, they should make profits. It is the duty of the state to maintain the price line. The oil companies buy the crude at international prices, and the refineries too sell the product at international prices. But it is sold at the pump at a reduced price. It is this deficit that is undermining the oil companies.

The way out is that the government should buy the petroleum products at the market price from the oil companies and sell it at a controlled price to the poor people. This is what happens in the public distribution system (PDS). There should be a PDS in the oil sector as well. Kerosene should be sold to the poor at government outlets.

A subsidy regime always spawns a black market. According to a government study, 40 per cent of the subsidised kerosene is diverted to the black market. In monetary terms, it translates to tens of thousands of crore. That is why, the vested interests who benefit from this black market do not want the price controls to be removed. If the kerosene is sold at the market price, the government will be able to mop up tax revenues worth about Rs 30,000 crore.

There are many sincere people who want to protect the poor through price control. I too am for it.But what they do not realise is that a subsidy meant for the poor is helping the rich. What is required is a better targeting of the subsidy.

Oil companies have long-term contracts with suppliers. Don’t they buy crude at prevailing prices?
Yes, there are long term contracts for ensuring continuity of supplies, but this does not apply to prices. You have to pay for the cargo at the price prevailing at the time.

Do strategic reserves help to keep the prices down at a time like this?
India does not have strategic reserves like the United States and Japan. Our reserves last only for a month. But strategic reserves are meant to ensure supply security, not price security. President Clinton did release from the strategic reserves once to control the price in the market, but that was a one-time market intervention.

Will oil prices continue to go up?
Yes. At the moment it is summer and the demand is low. The prices are bound to rise even more in winter when there will be greater demand.

OPEC says speculation is causing the rise. The Americans blame greater usage by oil-producing countries.

It is true that consumption in oil-producing countries is growing. And so is oil consumption in India and China because of the brisk rate of economic growth. But the truth is that American consumption is growing more. If Indian consumption grows by 5 per cent for 200kg per capita consumption, the 5 per cent rise in America is growing for 5000kg. Speculation is not the only factor for the rise in prices. Speculation has always been there. But speculation accounts for only 20 per cent of the rise. The real reason is that costs of oil production have gone up along with that of other commodities.

What problems will the Indian economy face?
Inflation has gone up from 4 per cent to 8 per cent even when the oil prices have been kept at a constant. The prices of all commodities have gone up. The price of steel has gone up. Even the price of mineral water has gone up. Yet people are buying mineral water at the higher price. There is no reason why the oil prices should not go up.

Has not the administered price system been dismantled?
It was decided in 1997 to dismantle the price controls, but when the time came to implement it on April 1, 2002, the then National Democratic Alliance government did not do it.