The Economics of Petrol Price Hikes - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 16 February 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
On Friday, a new series of petrol price hikes were announced. Petrol prices will rise by Rs. 1.50 and Diesel prices by Rs. 0.45. Naturally, there is opposition to such moves given that it hurts consumers, and companies that need to transport goods. The usual justification given for the price rise is that state owned companies continue to make losses on petrol, and thus need to keep increasing prices.

But is their claim actually correct? First off, let's consider how much petrol prices have risen in recent years. What we find is that in real terms, prices are around the same as they were 10 years ago. Over the last ten years, petrol prices have gone up by around 133%, while at the same time inflation over this period is around 120%. Thus, the petrol price has hardly risen in real terms.

From that perspective, we should not be angered by the recent rise in prices, as it simply reflects inflation. What about the second part of the equation? Is it really the case the prices need to go up because state owned oil companies are losing money?

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Technically, they are losing money in the sense that they sell petrol and at a lower price than they purchase it on international markets. However, consider the fact the nearly 50% of the price we pay for petrol is tax. This tax of course goes to the government.

Thus, on the one hand we have a government making large amounts of tax from the sale of petrol , while the state owned Oil Company is losing money. Given that the oil companies have are owned by the government anyway, it really isn't the case that they are losing money! Once we account for the fact that the government is making money from taxes, it is no longer the case that petrol is subsidized.

The evidence of this is that Indian petrol prices are around the same as average global petrol prices. Since most countries face the same global oil prices, our petrol price would need to be much less than the global average if it were truly subsidized. However, this is not the case.

It is nonsensical that we have a structure of petrol prices such that the state owned Oil Company is losing money while at the same time the government recovers it through taxes. The petrol price subsidy is nothing more than an elaborate hoax.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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23 Responses to "The Economics of Petrol Price Hikes"

RK JHA

Feb 19, 2013

Petrol compensates the subsidy given towards diesel, kerosene and cooking gas. Atleast that has been the case till now.It is only in our great country that petrol is costliest fuel vis a vis diesel and kerosene. Subsidy given for the so called farmer and the weaker section of society by way of reduced prices of kerosene and diesel at the cost of petrol should be scrapped by the govt. It doesnt help the targetted communities.It goes some where else .

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lmsharma

Feb 19, 2013

pl understand the duality.by enhancing prices of petrol and diesel in one go,tyey are subsidising diesel at cost of petrol users.

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Borkar

Feb 18, 2013

Do u think our Netas and Babus are concerned with the hike and its effect on honest citizens. They get the fuel at our cost. The whole issue of fixing the price requires independent study. U increase the fuel price on the basic cost, but in fact what is being done it is increased on todays cost so the increase is snow balling. $ Rupee parity is it maintained while increasing the price? There, I think, no transperency in this whole business - Borkar

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R V Iyengar

Feb 18, 2013

Had never compared the international price of Petrol with that in India. Your column is an eye opener to me.
Nobody,( BJP/ Mamata or Communist parties)ever talked about it when protesting the price hike in diesel. That kind of indicates that either the Parties are ignorant of it or are complacent with the existing prices. The protests are then sheer posturing and nothing else.

Coming to the pricing policy, the Government makes money while the companies loose whereby the share holding public looses the dividend rightfully due to them.That's a double whammy for the people!

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sudhir adhikari

Feb 18, 2013

It really makes one think of the ways of the Govt. It is not the good of the Oil Companies that it is looking for but how to fill the bellied pots of the ruling class which sees it as an opportunity to fleece people.This is what even any ordinary citizen like me feels like. Further fleecing is when more than 33% of the price of a car fills the coffers of the govt. The
concept of benevolent govt. is over.
concept of benevolent govt. is over.

Sudhir Adhikari

concept of a benevolent govt. is dead.
Sudhir Adhikari

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BANGERA

Feb 18, 2013

high petrol prices are a elaborate hoax on us as you so rightly & succinctly put.
we are being robbed by the govt. i have been telling my friends since long that almost 40% is maharashtra govt tax on petrol in mumbai....& 33% of the cost of a new car is due to taxes...
thanks.will forward your article...rgds bangera

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sangamam

Feb 17, 2013

Yes, what you say is true. Government is making money for nothing, infact the political middle men and enjoying the fruit of price rise and tax collections. Public should calculate the fact. WHY IS CAG NOT COMMENTING OR REPORTING ON IT, JUST BECAUSE GOVERNMENT IS MAKING MONEY

Like (1)

Rajendran Thuruthiyil

Feb 17, 2013

Well said, sir.

Like (1)

B S MURTHY

Feb 17, 2013

The Government is dragging the entire country into the vicious circle of INFLATION. They do not have a standard or stable economic policy. They have been consistently depreciating the intrinsic value of RUPEE for all these 65 years, not only in terms of WPI, not only in terms of FOREX, not only in terms of gold, but in terms of anything and every thing.

Like (1)

Ragini Ghanekar

Feb 17, 2013

This is very interesting idea. This thing was mentioned before but not this clearly and concisely. But what about the fact that petrol prices have risen internationally in dollar terms? A bit confusing.

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