Don't celebrate the recent fall in crude oil prices-as yet. As it turns out, we haven't been billed for the flare-up in global crude prices in the past six months. The arrangement that insulated consumers from a price hike so far-distributing the burden of higher crude prices between the government and oil companies-has reached a dead end. For some weeks now, Petroleum Minister Mani Shankar Aiyar has been working with the Finance Ministry and the Left parties to end the deadlock, but an increase in the prices of some or all petroleum products seems imminent.

Oil marketing companies claim they are the worst victims of the indecision on pricing. Even after the recent fall, global crude prices are 20-30 per cent higher than their November 2004 level-when domestic petroleum prices were last revised. The inability of oil companies to pass on higher crude prices to consumers has dented their profitability (see table). This at a time when they are investing an estimated Rs 38,000 crore on fuel upgradation to meet the fuel quality norms set by the Supreme Court.

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The companies claim that the retail price of petrol and diesel should go up by Rs 4-5 a litre, the price of kerosene by Rs 11.05 (current price Rs 9.01) and that of LPG by Rs 210 a cylinder (current price 281.60 in Delhi) to compensate them for what they call "under recovery". This isn't the same as loss-at least not as yet. Under recovery means companies are being denied a fair share of profits. All oil marketing firms will report lower profits in 2004-5 compared with 2003-4. And they have warned that the future may be worse-if retail prices aren't raised, they may report losses in 2005-6. IBP slipped into the red in the second half of 2004-5.

One way to let oil companies raise margins without affecting retail prices is to reduce taxes on petroleum products. Of every rupee that consumers spend on petrol and diesel, the taxman takes away the lion's share. For instance, out of the Rs 37.97 paid for a litre of petrol in Delhi, Rs 22.50-or 59.2 per cent-goes into the government's coffers (see graphic). On its part, the Finance Ministry has reduced tax rates and adjusted the tax structure on oil three times in the past one year. The last adjustment was as recent as in Budget 2005, though that has become a bone of contention. The budget reduced customs duty on some petroleum products, changed and increased excise duties on some products and imposed an additional highways cess of 50 paise on diesel and petrol. The net effect of these changes was "revenue neutral"- i.e., these changes did not entail additional costs or revenues.

The claim has been disputed on two counts. Even if the overall revenue impact of the tax changes is neutral, neutrality doesn't apply to specific products. For instance, post-budget, the tax on petrol and diesel has gone up but has come down on kerosene and LPG. Even on an overall basis, the budget isn't revenue neutral if the 50 paise cess is taken into account. The Finance Ministry claims that since income from the cess (about Rs 3,000 crore a year) won't come to the general pool of government revenues but will go to the Roadways Ministry, the cess shouldn't be counted as a tax. But that's a technicality. A tax is a tax, whether it goes to one ministry or another. What is relevant is that it hikes the prices of petrol and diesel at a time when oil companies have been prevented from raising prices to recover their falling margins.

Last heard, the Left parties-self-appointed protectors of middle-class interests when it comes to oil prices-were acting as the key arbiter of how to break the impasse. The right prescription for the Left to put forth would be to go for a mix-keep the highways cess in abeyance till global prices cool off, allow some hike in retail prices and work on a long term solution that does not bring ministries and companies head to head every time global oil prices flare up.

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