January 25, 2015

Why the Prices of Petrol & Diesel should be Cut?

Brinda Karat

THE crash in global crude oil prices raises questions in relation to the petroleum pricing policies of the Government of India. India imports around 80 per cent of its crude oil requirements so international prices of crude oil have a direct bearing on the price of petroleum products. In January 2014 when the global price of crude oil was 106 dollars per barrel the retail price of petroleum products, petrol and diesel were Rs 72.43 and Rs 54.34 per litre (Delhi prices) respectively. In January 2015 when global prices have crashed to 45 dollars per barrel the retail price in Delhi has come down to just Rs 58. 33 for petrol and Rs 48.30 per litre of diesel. In other words, the price of crude oil has come down by 58 per cent, while the retail price in India has come down by just 19 per cent for petrol and 11 per cent for diesel compared to the prices last January. Even if the lower value of the rupee vis-a-vis the dollar is factored in, the gap is still huge. Further, refineries have stocks of crude bought at earlier prices so there is a timelag for the benefit of the lower prices of crude oil to impact on the overall cost of production. However since prices have been coming down over the last six months, even the stocks of crude oil which oil refineries have with them, was imported at much lower prices month on month compared to the previous period. The main problem is the method of pricing of petroleum products decided by the Government of India. India imports crude oil not the finished refined product, ie, India does not import petrol and diesel. But the government's faulty policy links the pricing of petroleum products not with crude oil prices which India imports but with the international price of the finished product which India does not import! India's cost of refining the crude oil into petroleum products is much less than the international pricing. India's private sector companies like Reliance and Essar who have big refineries, had been demanding that import parity pricing, which means linking the final product with international prices should be done. Both the UPA and NDA governments had obliged. Thus, these companies make big profits through the IPP policy. It was the CPI(M) which first blew the whistle on this fraudulent policy of the government. In parliament, the late Comrade Dipankar Mukherjee as Member of Parliament and of the Standing Committee of Parliament on Petroleum had made an incisive analysis of the actual cost of production compared to international prices and also domestic retail prices. The demand was raised that petrol and diesel prices be based on cost of production with a reasonable margin of profit, which was put at 12 per cent. The government had no logical answer. Many questions were subsequently raised in parliament on this issue. In April 2011 when the price of crude oil was above 110 dollars a barrel, the then government informed parliament that the cost of "fuel component" for one litre of petrol was Rs 30.22 and Rs 25.11 for one litre of diesel. Fuel component is the cost of crude oil+ processing cost+ overhead cost+ GRN (Gross refinery margin), and also includes freight. In other words, the production cost of one litre of petrol plus a margin in 2011 was Rs 30.22 and for diesel Rs 25.11. Now with a huge fall in the prices of crude it stands to reason that the production cost of petrol and diesel would be less than what it was in 2011, even factoring in inflation and the depreciation of the rupee. Estimates at current prices of crude put the cost of one litre of petrol at around Rs 28. Compare this actual cost with the retail prices and it can be easily understood that the cuts in petrol and diesel being claimed by the Modi sarkar as proof of its commitment to bring down prices is an utter fraud. Instead of passing on the benefits to the people the Modi government has raised taxes and duties on petrol and diesel four times in three months increasing its own revenues by around Rs 20,000 crores. On this count it has broken even the UPA record in cheating the people. The central government levies taxes, customs duties, excise duties, various types of cess to increase revenue for itself. The annual central revenue from the petroleum sector went up from around Rs 46,000 crores in 2001 to Rs 1.36 lakh crores in 2010-2011. The estimate for 2013-2014 is that the annual revenue was more than Rs 2.6 lakh crore for both central and state governments. Now it will increase further. State governments, who in large measure are at the mercy of the central government as far as resources are concerned, also add sales tax and in some cases VAT to augment their resources. This also shows up the skewered tax policy of the Government of India. As much as 40 per cent or so of its revenue collections is just from the petroleum sector. It is known that the prices of petroleum products have a direct and indirect cascading impact on inflation, and high prices of petrol and diesel will inevitably lead to higher prices of other commodities. At a time when people have been suffering high prices for over a decade, this was the opportunity the government had, to bring some relief for the people. But it chose to cheat the people and continue the policies of the previous UPA government, going one step further. If the government requires raising money to meet its deficit, it should give up its annual concessions to the corporate sector amounting to Rs one lakh crores. This is the hypocrisy of deregulation Modi style, a case of heads I win, tails you lose. If prices of imports go up, you pay and I gain, if prices go down, you still pay and I still gain. The demand to cut petrol and diesel prices in India is urgent and just. Some Issues on the Fall of Global Prices of Crude GLOBAL crude oil prices have fallen by 58 per cent in the last year. What could the reason be for such a record of decline in global prices of oil? Analysts say there is (1) a slowdown of the global economy reflected in lower demand for oil (2) no change in the level of supply of oil with the OPEC countries decision to not cut production targets leading to a mismatch between demand and supply with a global oversupply of oil leading to lower prices (3) the shale oil boom in the US with America emerging almost equal to Saudi Arabia as the world's largest producer of oil (4) possible speculation in oil futures markets leading to manipulation of prices. These reasons taken together indicate a play of geopolitics of which so far only the tip is visible. The stubborn refusal of the developed capitalist world to change course from the destructive policies which created the 2008 crisis and on the contrary, to make things worse by the adoption of so-called austerity measures have further lowered the purchasing power of the people and shrunk demand. There has been little or no recovery post 2008. However ironically, it is only in America, where the initial bubble had burst with cataclysmic global ramifications, which has seen some recovery. One of the reasons for the US recovery is because of the big increase in domestic crude oil production using new technologies of “fracking" which releases the gas and oil in rock formations producing shale gas or oil. The production of shale oil in the US has gone up from 0.4 million barrels a day in 2007 to more than 4 million barrels a day in 2014 described by many as the shale oil boom. Although exports of oil are prohibited in the US, shale oil has acted as a substitute for the oil that the US had to import thus reducing global demand. The US now ranks just below Saudi Arabia as the second largest oil producer, having overtaken Russia. Apart from helping recovery of the domestic economy, there are other implications. Since technologies in shale oil production are costly and since the high prices of crude oil and expectations of good profits drove the investments towards this sector, present global low prices if continued will certainly impact negatively. The US is therefore interested in putting pressure on the OPEC countries to cut production so as to prevent a further fall in oil prices. The OPEC countries have a different point of view and also differ amongst themselves. The OPEC countries comprise of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE and Venezuela. The OPEC was formed in 1960 as a response against the domination of the international market by multinational companies based in the US and some European countries. The formation itself gave greater strength to the oil producing countries to take sovereign decisions. But with the changing international situation, the US wars against some member countries in the OPEC, the equations kept shifting. In spite of these conflicts, the OPEC more or less continued to act according to its charter of unanimously deciding production quotas and prices. However there were occasions when some countries like Saudi Arabia took individual decisions. At the present juncture, the OPEC driven by Saudi Arabia has decided it will not yield to pressure and will not cut production which at around 30m barrels of oil a day is 40 per cent of the world's production. This means that the demand supply mismatch will continue. In its meeting in November 2014 in Vienna, the OPEC Council declared that apart from market fundamentals such as "moderate demand and ample supply" "speculative activity in the oil market has also been an important factor" indirectly blaming non-OPEC countries primarily America for speculation. It also has held that non-OPEC producing countries should take the first step of cutting supplies. Saudi Arabia has the largest oil company producing 11m barrels a day. Its cost of production is less than one third of that in the US. It therefore believes it has much stronger staying power than the shale companies in the US which may not be able to survive if the present situation of low prices continue. However within the OPEC countries there is a differential impact on the domestic economies of some of the member countries. Venezuela, Iran and Algeria were among those in Vienna who asked for steps to arrest the fall in oil prices which were hurting their domestic interests as their economies are much more vulnerable. It is to be seen how far these countries can go along with what is clearly a Saudi Arabian driven decision not to cut production targets. Russia is another country which has high stakes being till now the second largest producer of oil which brought in substantial revenues. In the wake of the developments regarding Ukraine and the sanctions imposed, the Russian economy is sought to be destabilised by America and its allies. At present there is no decision from Russia that it will cut its production. Thus it can be seen that there are complex factors at play. The US which sought to gain the advantage and hurt the economies of countries like Venezuela and Iran is now itself in trouble with the price going down to levels which, according to experts, cause serious problems for the shale companies.With clashing interests between the oil producing and exporting countries, the oil price situation is volatile. The warning given by the OPEC countries about speculative activity should be taken seriously. There are reports that, given that prices of oil delivery dates for later this year are higher than present prices, a type of "hoarding" of oil has started. Oil traders are looking for storage space such as floating tankers at sea to store oil. 90 per cent of land based oil storage capacity is controlled by the big oil companies like Chevron Corp, BPP, Royal Dutch Shell. Reports state that it is the oil storage companies which are set to make record profits. Energy trading has also increased. Cargill, in a statement on January 8, 2015, stated that fiscal second-quarter profit rose 41 per cent to $784 million as earnings from energy trading increased. The business was bolstered by “effective risk management (quoted in Bloomberg website, January 14). In June 2006, the US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.” Again in 2008, the UN Special Rapporteur on the “right to food" presented a significant report to the UNGA which made a significant linkage between " massive amounts of novel forms of speculation in commodity derivative markets in food and in oils." It stated “market momentum based speculation in oil contributed to the food price crisis…petrol is an integral component of the modern food supply chain being used for fertilisers, food processing and transportation leading to an increased merger of the food and energy markets…" These reports have been ignored. That was at a time when prices were rising. Today it is the opposite, but as can be seen by the reports mentioned above, the role of speculation and manipulation cannot be ignored. This time the OPEC countries have raised the alert. For oil importing countries like India, the window of opportunity opened up by lower oil prices may or may not last long. But the major demand must be to bring the benefits to the people of India.