How should the oil pricing regime change?

Import parity prices for petro goods are totally rational and appropriate. The country is becoming increasingly dependent on oil imports, and with mounting prices in the international market, it would be justified for consumers to pay prices in this country that reflect the scarcity of oil in the international market.

Any alternative that pegs prices at lower than import parity levels implies that the government or the oil companies would have to make up the difference.

If this were to be the preferred option then not only would this have adverse implications for the entities that bear the burden of such subsidies, but it would also give incorrect signals to the consumer.

It is only through rational pricing that the country would be able to encourage substitutes for the current patterns of consumption and for moving towards more efficient vehicles, greater investments in public transport and, in general, much higher levels of efficiency in the use of energy.

It is totally inadvisable for the Cabinet to set oil product prices. It is another matter for the government to define the pricing policy. With the dismantling of the administered pricing mechanism (APM) in 2002, a system had been formulated for oil companies to set prices.

Unfortunately, the previous government deviated from this requirement, and the current government also has not been able to bring into being the intended system which would have brought market principles into the pricing of petroleum products.

The Cabinet has far more important issues to deal with than to be saddled with decisions on oil product pricing. Also, cabinet decision-making on this subject only politicises an issue that should be determined essentially by market forces.

If subsidies are to be provided for political reasons these should be carefully targeted and the cost of these should be borne by the government. The policy for this would certainly need to be laid down by the government but its implementation should be in the hands of the oil companies overseen by an appropriate regulatory body.

There is undoubtedly scope for competitive retail prices in the oil sector, and it is for the oil companies to compete and provide better services and lower prices which would be of benefit to the consumer.

The current system, which burdens the oil companies with huge losses, would only erode their efficiency and their ability to bring about technological innovation in their operations.

To this extent the entry of private sector companies in retail marketing of oil products on a much larger scale would have benefits for the consumer. An important issue in relation to oil product prices is the need to view all energy prices as integrated across different forms, including electricity, coal and natural gas.

While the state governments have set up regulatory commissions for electricity, the establishment of a regulatory body for oil and gas has been delayed unduly. In the ultimate analysis, it would be desirable to have a single regulatory body that covers all forms of energy to ensure that inter-fuel prices are uniformly rational across the board.

A regulatory commission in this sector once established should also consider the social costs of production and consumption, which would provide incentives for oil companies to improve the environmental quality associated with using specific fuels.

In this respect, oil companies must now look ahead, and think seriously about producing ultra-low sulphur fuel so that air quality in all our towns and cities could improve substantially, particularly with an increasing fleet of diesel vehicles.