India: Oil Price Deregulation to Have Far-Reaching Effects

08 Jul 2010 • by Natalie Aster
The Indian government is liberalizing gasoline and diesel prices.

With the government's decision to begin deregulating the petrol and diesel markets, the Indian energy retail sector is likely to go through major pricing reforms. However, the country's past track record of excessive political interference in oil product pricing policies suggests that the change into a liberalized retail environment may not be straightforward.

The Indian government's decision to free up gasoline prices and cancel subsidies on diesel in a step-by-step process is good news for both public and private oil marketing companies (OMCs). The move will improve the cash flows of the public OMCs, and the private companies can now expect a level playing field in which to compete with their public counterparts. Private refiner and marketer Essar Oil is already considering an effort to expand its retail network.

It is yet to be seen whether this decision is more of a knee-jerk reaction to the mindboggling increase in the budget deficit (where fuel subsidies account for an estimated $25.6 billion) or a committed move towards liberalization in the Indian energy sector. India initiated a similar policy in 2002 when it announced the gradual adoption of market-determined pricing for oil products. However, the move was short-lived, and the government did not allow OMCs to increase product prices when crude prices soared during 2007-08. This kind of regressive step could happen again if crude prices rise greatly and political pressure increases.

Apart from higher prices, the Indian consumer is likely to bear the brunt of another problem: an increase in the adulteration of deregulated gasoline and diesel with subsidized kerosene. The issue has plagued the Indian retail sector for a long time, and the possibility that the deregulation of selected oil products will make the situation worse cannot be ruled out.

It is beyond doubt that the decision will have far-reaching effects on the Indian energy sector. The private OMCs will closely monitor the government's commitment in the next couple of years before finalizing their market strategies. International OMCs, which are currently represented through the limited presence of Shell, might also be interested in the success of this decision, as it could open the door for them to enter a retail market that is growing in terms of the quantity of oil products sold annually.

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