Oil - Daily Pricing Mechanism

Why in news?

A pilot project has been proposed by the three public sector oil marketing companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum — in an effort to reform the pricing mechanism.

What is the project about?

• Starting next month, in select cities fuel prices at the pump points will be reset daily in par with global oil price movements.
• The rest of the country will continue with the existing system, till the project’s outcomes are assessed.
• In the existing system petrol and diesel prices are calibrated generally on a fortnightly basis.

What is the necessity?

• This is in line with the best practices in the international market.
• It is illogical for an economy integrated with the global financial and commodity markets to keep fuel prices unchanged for as much as a fortnight.
• Aligning prices daily and spreading out the degree of change will lessen the impact on consumers.
• Oil costs often bring down consumer confidence due to fuel inflationary expectations. Marginal changes in the daily price of fuel, rather than abrupt shifts over random intervals will reduce this.

What should be done?

• Transparent Pricing - After more than two months of no change, the latest price cuts came overlapping with the Assembly elections in five States.
• A transparently formulated and dynamic pricing regime would prevent such undesirable coincidences in the future.
• It would also allow private companies to compete with the PSU oil marketers, which today control 95% of fuel outlets.
• Less Tariff - The government must also reduce high petroleum product taxes imposed since June 2014, when oil prices began to fall, along with reduction in energy subsidy liabilities.
• Policy on Independent Oil Retailers - In US, big oil corporations like ExxonMobil, Chevron, Shell or Conoco-Phillips own barely 5% of the fuel outlets.
• The rest of the retail business is run by independent players, who are in no obligation to ensure business to a captive refinery.
• In India, for example an IOC fuel outlet buys petrol or diesel from a refinery run by the same PSU outfit.
• Such elimination of competition means that decontrolling retail prices will give the consumer only less benefits of the market.
• A policy on independent oil retailers should be the next move on the government’s agenda.

Source: The Hindu