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Centre’s oil policy evaluation (Relevant for GS Prelims, GS Mains Paper III)

After a sharp fall at the beginning of the year, oil prices have risen dramatically in recent weeks. The price of Brent crude has risen by around $10 since it touched a short-term low of around $62 in early February, hitting its highest mark since late 2014.

Reasons for rise
Tensions in West Asia after U.S. President Donald Trump’s decision to strike Syria helped push up prices. But it is important to separate short-term volatility in oil prices owing to geopolitical tensions from longer-term trends in the oil market. In its latest market report, the International Energy Association (IEA) noted that with oil prices ruling over $70, the Organisation of the Petroleum Exporting Countries (OPEC) has “accomplished” its goal of ending the glut in global oil supply. Notably, OPEC cut production by around 201,000 barrels a day in March compared to February. Yet, total world oil supply actually rose by 180,000 barrels a day in March, as output from non-OPEC countries, including the U.S., has been increasing in response to higher oil prices.

Criticism of government policy
In India, rapidly rising international crude oil prices have failed to push local petrol and diesel prices upwards in equal measure. The retail selling prices of petrol and diesel across major Indian cities have in fact risen by less than a rupee since the beginning of April. That is, they are not in sync with the upward rise in crude oil prices. Last week, Prime Minister Narendra Modi called for more ‘responsible’ oil prices, which he said have been in “roller coaster” mode for too long. Oil prices, he argued, need to factor in the interests of both consumer and producer. This assertion, along with the talk of allying with China and other Asian countries now to buy oil from OPEC members at lower prices, would have held more weight if the government’s actions matched the sentiment.

It has imposed high duties on petroleum products ever since crude oil prices started moderating in 2014 but has been reluctant to scale down those duties in the face of rising prices, leading to record pump level prices. This clearly doesn’t benefit the consumer.

Now, with the general elections about a year away and critical Assembly polls in Karnataka just a month away, the Centre is being cautious not to have higher oil import costs passed on to consumers.

Fake deregulation of Oil Prices
This flies in the face of the pricing freedom it had ostensibly granted to the oil marketing companies and packaged as a major deregulation reform. So, its stance hasn’t benefited the producers either, as is reflected in their falling stock prices. How the Centre responds to rising international crude oil prices was always going to be the litmus test of its commitment to fuel price deregulation. In the current situation, it appears that the government has only tied itself up in knots over the petroleum pricing policy, and with it, its reformist credentials.

(Adapted from The Hindu)

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