Price cuts don't make economic sense

International energy prices have been on a roller-coaster ride the past few months. The price of India’s crude oil basket has fallen by 62% over the past four months, since it touched an all-time high. While the fall in prices has prompted the government to decrease retail prices of petrol and diesel, the average crude oil price for the current financial year hovers around $102/bbl and the prevailing retail prices are much lower than the corresponding trade parity petroleum prices. The current price decrease makes political sense, with elections around the corner, but doesn’t make economic sense. The oil companies still have inventories, which they had procured at high prices, and these would need to be sold at lower retail prices, thus adding to their financial woes. The price decrease is expected to boost automobile demand, an attempt to help the ailing automotive industry. But this could end up being a double-edged sword; with increased congestion on already overloaded roads, and expected increase in emission from the incremental vehicle use. Given that demand for both diesel and petrol is inelastic, its impact on increasing vehicle sales is debatable. Alternatively, the government can consider increasing domestic demand by increasing investments in infrastructure projects, which is a more sustainable option for India to prepare for the upcoming economic challenges. Unlike others, price of kerosene has not been revised since 2001 because it is conceived to be the poor man’s fuel. In reality, only a marginal amount of kerosene trickles to the poor. There is an urgent need to plug these leakages and target subsidies. This can decrease financial outflow of the government and the oil companies to only 2% from existing levels. Decline in international oil prices has renewed interest of private sector companies in the domestic petroleum retailing sector. The government should make most of the current situation and move towards a market-determined pricing at the earliest. The advent of competition will put a downward pressure on prices and render the sector more efficient. Hence, without wasting any time the government should move towards the much-needed oil sector reforms.