What We Really Need Is Better Regulation, And Not Deregulation Of Oil Prices!

Posted on November 4, 2014 in Politics

By Huzefa Dhinda:

Yesterday morning, all was normal cheerful. I drove my car into a friendly neighbourhood oil filling station. They had new swanky dispensers, modern pumps, dazzling electronic meters and whatnot! My heart scrambled and grew exuberant looking at these things, like a little boy’s at a fest. While I waited for the salesman to dispense oil into my car’s tank, I observed a little stray lizard hopping around the dispenser. Looking at its beady glittery eyes, I was lost into oblivion, studying about a piece of news that I had read a while back – Price Deregulation of Oil.

deregulation of oil prices

Wheels of fortune, Lady luck, Tykhe, everyone and everything has been on Modi’s side since the LS elections. For some reason, even the prices of crude oil have shown loyalty to the new Indian leader. Oil being a universal intermediate, has caught attention not only because of its reduced price, but also because of insensible government policy of de-regulation.

You can argue with me, forever, on a coffee table about the plus points of de-regulation. We can gulp down liters of beer together discussing its positives. But there are a few blunt downsides which can not be ignored. The de-controlling policy has an attractive face value but it is not immune to failure in the long run.

Before deregulation, there existed a protective umbrella of the government over the head of the consumer. There existed a cushion, an artificial stabilized price for this commodity. Now with this de-regulation, the consumer’s cost floats directly with the vulnerable international crude price which can be aggrandized by any non-economic principles too. [1] Right now, a sun is shining and we are making hay. But the real challenge will be when the cost of crude spikes and pulls the rallying inflation up along with it. Economists theorize that these swinging prices will eventually fall and will average less for a given year. Arguing for volatile prices is like claiming that the person with one arm in a freezer and the other in an oven is perfectly alright, on average.

De-regulation can also consolidate existing domestic players and such consolidation can monopolize the market. For example, on an occasion by an agreement between the companies, the diesel price in Philippines was found to be rising faster than the global crude price. In such cases, the cost isn’t justified by the movements of global crude prices. [2] Another disappointing example comes from the Chinese automobile industry. Now China’s regulators appear to be taking steps to protect their auto industry by bringing antitrust investigations against foreign competitors in their country. This is because the Chinese brand of cars seem to have failed to live up to the government’s sales expectations. [3]

The theory speculating that inviting private players to the party would intensify the competition and reduce the prices, can also be punctured. A beautiful example already exists at home. A certain MNC, despite facing stiff competition and constraints from government companies, sells its products at a higher price in the name of better quality. An augmented competition in this case has failed to curb the rising prices. [4] [5]

Minimizing the control of the government and leaving the private sector to exploit resources can not always be the answer. On one hand, by auctioning of coal blocks, the government is trying to put into use its alternate source of energy, on the other hand, it is making such alternatives unfeasible by encouraging de-regularized sources of oil. [6]

The government policy is a little short of being a marvel in terms of utility. Economic freedom leads to economic growth. But this growth should be public driven and not business driven.

In this twilight of progress, we cannot afford to be against the corporates. Corporates were and continue to remain our assets. But it is for the corporates to understand that we want them to make the next iPhones, next BMWs, next generation of batteries. We want them to influence many things of our life, but not laws.

What India requires is better regulations. Not de-regulations. It requires a better cushion provided by the government. The games played by the private investors in absence of good government policies can ruin even a healthy economy.

“Sir, Card or Cash?“, asked the salesman at the filling station, knocking the window of my car. I pulled out my card as I woke up from my psuedo-slumber. The lizard was now leaping on the ground with a small kitten in front of it. The kitten tightened it muscles, sniffed the air and swiftly pounced on the little lizard. The kitten was shrewd and calculative. During the pounce, it had determined the final position of the lizard. It held the little reptile in its paw and controlled its movements. It did not kill. It only controlled.

Of course the lizards will play their games when the cat is away.

1) http://faculty.georgetown.edu/imo3/rdcop.htm

2) Local diesel prices rising faster than global crude rates since oil deregulation

3) How China Protects Its Auto Industry

4) http://hproroute.hpcl.co.in/StateDistrictMap_4/ms_hsd_price.jsp?param=C

5) Fuel Pricing at Shell Stations

6) Are Declining Oil Prices Increasing the Risks to OPEC, U.S. Energy Security or Clean Fuels Supplies?