“We are really subsidising the OPEC”

Crude oil costs $135/barrel globally, but Indian prices of petroleum products have long been linked to barely $60/barrel. This has meant under-recoveries — explicit and implicit subsidies to consumers — of a whopping Rs 2,45,000 crore … Yet, political parties have launched agitations in protest. Politicians cynically pretend that high oil prices are the fault of the government, not Opec or global trends …

… Back in 1974, when Opec first sent oil prices skyrocketing, India had no giant consumer subsidies or agitations against oil prices. The price of petrol doubled overnight, inflicting much pain. India was very poor then. Today, it is much richer, and better able to pay the full world price. Yet, that prosperity has also brought the capacity to subsidise on an unprecedented scale …

Ideally, India should pass on the full cost to consumers, as it did in 1974. But for politicians who view high subsidies as electoral necessities, here is a proposal. First, abolish all implicit and explicit subsidies on oil. Use the money saved to cut excise duties on other items of common consumption and provide cash to poor families. Overall inflation and government revenue will be unchanged. Yet, the poor will benefit, and high oil prices will encourage energy-efficiency …

Read the full article here.

Recently we had a hartal in Kerala protesting against the increase in the price of petrol, diesel and cooking gas. As is the culture in Kerala, everyone happily accepted the holiday. But how many of us think of the foolishness of such protests? Are we not aware of what’s happening in the world? It’s easy for opposing parties to protest whenever there’s a price hike. It’s the curse of today’s politics.

Like the author says, it’s a big big mistake to subsidise oil. Today we might enjoy lower prices, but how far can the government subsidise? One day everyone will have to suffer, no doubt. And the other side is that high prices would force the people to consume less energy, and breed a healthy habit of being energy efficient. What’s happening today is that the government is subsidising the destruction of our environment.

3 thoughts on ““We are really subsidising the OPEC”

  1. Have a look at one of the responses to the article in the comments. Snippet from the same:

    “India has had over $4/gallon petrol prices for a very long time – even when the crude oil prices were $60/barrel – while these are just getting there in the US! Let’s do a quick back of the envelope calculation: one barrel of oil has 42 gallons; at $60/barrel, that is < $1.50 / gallon; add about $5-7/barrel as refining costs/margin and may be another $2/barrel as transportation / marketing / distribution costs; that takes the total add on cost to the crude cost of about $10/barrel or ~$0.25/gallon; making a total of $1.75/gallon at the pump! At Rs.45/USD (average; though it is much less now and was close to Rs.48/USD about 3-4 years ago), this translates to ~Rs.80 to the gallon or ~ Rs.20 to the liter! And, we were paying Rs.48-50/liter at the pump last year even when the crude prices were $60/barrel! About 60% of the price of petrol at the pump in India is because of excise/duties/taxes!”

  2. I wasn’t aware of the figures regarding petrol. I knew of the heavy subsidies in LPG (which is about 50%), and when I read the article the whole scenario seemed very real. I guess the author must have made some mistake. Thanks for pointing this out!

    I searched for “oil subsidies in india” and interestingly, found some other very similar articles and responses. Here are a couple of them:

    http://www.businessweek.com/magazine/content/08_24/b4088036744478.htm?chan=rss_topStories_ssi_5
    http://economictimes.indiatimes.com/G7_calls_for_an_end_to_oil_subsidies_in_India/rssarticleshow/2770052.cms

    What does this really mean? Why do all these articles talk about heavy subsidies on oil?

  3. As far as I understand, the oil prices are subsidized for sure. But, at the same time, there is heavy tax imposed, which goes to the government. The sum of the subsidized petrol price and the taxes, is what an one pays in India; which is greater than what one would be paying in the U.S, for example.

    I guess, the author is correct, but just didn’t bother to discuss about the price breakup.

    But then, the heavy tax on oil is also questionable/debatable.

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