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Price freeze: on high fuel prices (Relevant for GS Prelims, GS Mains Paper III; Economics)

Abandoning daily revision of prices
The price of oil has been shooting up for weeks now, with Brent crude oil futures hitting their highest level in more than three years, at more than $75. But for two weeks now, the state-owned oil companies have kept petrol and diesel prices unchanged. Since April 24, the oil companies have abandoned the daily price revision. Since then, the prices of petrol and diesel in the national capital, for instance, are stuck at Rs.74.63 and Rs. 65.93, respectively.

Reason for freezing prices

  1. This is a glaring freeze, given that since the Centre introduced the dynamic pricing mechanism in June last year allowing oil marketing companies (OMCs) to revise fuel prices daily, the retail prices of various domestic fuels had been on a steady uptrend owing to the steep rise in international crude oil prices.
  2. The new pricing mechanism also caused prices to show more volatility on a daily basis compared to the earlier regime when prices were revised periodically, mostly on a fortnightly basis.
  3. Further, the rise in domestic fuel prices in response to rising crude oil prices has been quite inelastic recently. Petrol and diesel prices rose by 1 to 2% in April while Brent crude rose by more than 8%. This comes as a pleasant surprise considering that domestic fuel prices, which while not falling to an equal extent when crude prices witness a sharp drop, generally keep pace with any rise in oil prices.

Political pressure
The retail price of petrol is a hot political subject and successive governments at the Centre are routinely held responsible for it. It is therefore speculated that the OMCs are under pressure from the government to withhold upward revisions in the days before Karnataka goes to the polls.

What govt should do?
The government should opt to ease the burden of fuel taxes. The best way to do this might be to bring domestic fuels under the purview of the goods and services tax. For now, there is enough room to bring down prices by reducing excise duties on oil.

(Adapted from The Hindu)

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