Monday, July 7, 2008

The Fuel Price hike

The past month or so has been abuzz with the noise of crude prices. Last week crude oil touched a new high of over 143$ a barrel. Besides the Indian government’s decision to increase fuel rates has also drawn attention from all corners, with some terming it as not enough while others terming it as too much to bear.

But the big question is why the international crude prices are spiraling like anything? Why are the OPEC nations not increasing their output? Why is the government not reducing taxes on retail oil?

For answer 1 and 2, the reasons are pretty simple: Why would somebody sell his/her produce for less, when you are ready to purchase that thing even at the increased price? The rise in price of a commodity is a very natural process in case of increasing demand / stable production or stable demand / decreasing production. So remain clear on the fact that you cannot continue to increase your oil consumption and still demand it at the same price. This fact has nothing to do with the government policies or anybodies greediness, it is technically economics and in lay man terms- business. There are no two ways about it. The same argument pretty much answers the second question as well. To make more befitting argument consider this analogy. Why would you kill your geese that laid the golden egg everyday? Especially if the price of the egg is rising everyday and you have buyers for it even at the increased price. Besides you know that one day the geese will die by itself, so why not try to preserve its life as much as possible. Wasn’t this the wisdom taught to us in our value education classes? So why is the world crying hoarse when the Oil producers are practicing the same wisdom? In fact, what has been stated here as wisdom is being touted by many as greed. The reason for this is our dependence on oil. Even the whole argument of greed can be turned upside down, when we consider our own greed for growth. Today we are living in a world which is enamored by the idea of growth even if it augurs for unsustainable practices. This argument would alone entail a long discourse and so let’s keep it besides the purview of this discussion.

Now to answer the third question: Why is the government not reducing taxes on petrol and diesel? This is a pretty debatable issue and ultimately as it turns out in case of debatable issues is that we have to settle for a middle ground (which according to me is pretty fine since everything is not black and white). But first let us take a look at the ‘refinery’ of taxes and subsidies that the oil goes through before coming into your fuel tank. The government gives subsidies on fuel so that the fuel may cost less to the general public. On the other hand, it taxes the same to finance various expenditures which include subsidies themselves. So why does the government Tax and subsidizes the same thing? Well, this is of course a bit paradoxical situation. The subsidy and taxes are different on different petroleum products. The mathematical jugglery ultimately results in making the petroleum products of essential usage like kerosene and LPG relatively (mark this word) cheaper than those of non-essential use like petrol.

The government’s kitty of revenue depends to a large extent on the tax levied on fuel. So if the government lets go off even a part of taxation on fuels, it will create a huge dent in its coffers - a few thousand crores here and there equals budget of many schemes.

Ultimately, its fact we have to live with, that even if oil is an essential commodity, it’s available only in a limited quantity on this planet. The oil reserves are coming down big time


Anand Kashyap said...

Brilliant post, buddy!
The taxes and subsidies part was very good.

gaurav said...

pretty gud analogies.....
The language wasnt too technical which again was a + point..kaash koi left ki website par yeh post kar deta....