India Moves To Mature Oil Pricing

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Oil prices in India is finally getting rid of the subsidy shackels. Petrol(Gasoline) price subsidy was removed last month resulting in market prices moving up by approx Rs 3.5 per litre above the psycholgical benchmark of Rs 50 litre while diesel prices were revised by Rs 2.0 per litre. According to a Government release market determined oil pricing is expected to do away with under-recoveries by the oil marketing companies OMC's to the extent of Rs 22,000 crore ($5 billion) for the balance three quarters of the financial year of 2010-2011. This amount was borne by the Oil marketing companies, Oil producing companies and the Government and was the effective net subsidies given to the consumers.

Subsidising Oil prices is a world wide phenomenon, be it in the United States or the Asian nations, only its forms and recipients vary. In the US it is the Oil companies who benefit from the Government subsidies, while in Asia the subsidies are towards reducing consumer prices. Subsidies in India was moderate unlike in other Asian nations like China, Indonesia or Malaysia, but still crippled the cash flow of India's three public sector oil marketing companies and two refiners as the Government took extended credit for the subsidies to be re-imbursed to the OMCs

Improved cash flow with the OMC's will enable them to shop from the spot markets, which is very important today considering the volatility in oil prices. The producer's oil pricing has become irrelevant after the traders at the commodity markets captured floating oil stocks and jacked up prices systematically by controlling market volumes as well as the quoted prices at the electronic commodity exchanges.

The only way out of this is to play the markets and control the prices like China and the US have of late started doing. For this liquidity and quick decision making is needed and unless the oil marketing companies are empowered this cannot be done. Controlling the public sector companies which are owned by the Governments are easier than controlling prices through private sector intervention. The decision of freeing oil prices from the burden of subsidies is therefore welcome in India, as apart from reducing budgetary deficits , it may work to bring down the consumption of oil in the fast growing but highly price sensitive Indian markets.

Besides it could help lower the international prices of oil if Indian buyers OMC's join hands with Chinese and US buyers to control volatility in the Commodity markets. The initiatives taken by Sinopec and China Bright Oil along with COSCO to increase the holding capacity of oil reserves in China and thus bring down the international prices of oil is commendable.

However if the Asian market is controlled by China Traders alone, it is unlikely to be beneficial for the Indian industry unless India develops its own stockpiles of oil.It is high time that the two Asian giants work together with other big consumers of the area like Indonesia, Malaysia and South Korea towards a realistic oil pricing around $70 a barrel.





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