Fuelling competition – PSU Oil Cartel

Fuelling competition – PSU Oil Cartel

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Inspired by the recent liberalisation of rules in the airline industry, petroleum minister Dharmendra Pradhan wants to make the oil industry also consumer-centric by promoting competition. Pradhan’s moment of awakening has come not a day too early. The oil industry was one of the first laboratories for experimenting with reform when refining and marketing was de-licensed and products such as naphtha, aviation fuel and lubricants were decontrolled in the early 1990s. Yet, after that, reform has largely bypassed the industry which has grown tremendously in terms of refining capacity largely due to private investment. The marketing side, despite the entry of private players such as Reliance Industries, Essar and Shell, continues to be dominated by the three public sector majors — Indian Oil, Bharat Petroleum and Hindustan Petroleum. And price-based competition is totally absent with the three PSUs coordinating pricing action. The private players are not complaining as the prices set by the PSUs afford them a good margin in the present low oil price regime.
This cosy state of affairs in fuel marketing needs to change and the Centre appears to be in the mood for it, going by Pradhan’s remarks. The minister said recently that the conditions governing investment by prospective retailers need to be re-visited to promote competition and ensure that consumers get the best prices. Presently, entry into the fuel retailing business is allowed only to those who invest a minimum of ₹2,000 crore in the hydrocarbons industry, whether in exploration and production, refining, pipelines or in liquefied natural gas (LNG) terminals. The original logic behind this regulation was that only those with skin in the oil game should be allowed to benefit from a presence in the lucrative retailing business. The country was short of refining capacity in the 1990s when this regulation was brought in. The scenario has changed now and it’s time that this rule is thrown out.
That said, it is unlikely that relaxing the rule will open the floodgates to investment or that the big oil companies will make a beeline for India. Setting up retail outlets is not cheap anymore given the soaring land prices. And the multinationals are in subsistence mode now with investments cut back drastically due to soft crude prices. Also, the PSU oil companies will be no mean competitors in the retailing business. Pradhan is right when he says that consumers should benefit from lower prices through competition. A good start will be to encourage competition among the PSU oil companies by allowing them to set their individual prices. It is time for transparency in fuel pricing.
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Source: The Hindu : Business Line

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