Bringing BPCL sale back on the table

Source: The post is based on an article “Bringing BPCL sale back on the table” published in The Business Standard on 28^th September 2022.

Syllabus: GS 3 – Industries and industrial policies

Relevance: problems associated the regulation of petroleum companies

News: Recently the government has put aside the idea to privatize Bharat Petroleum Corporation Limited (BPCL).

The reason behind it is the inability of the bidders to participate due to prevailing conditions in the global energy market.

However, it is not the only reason that prevents the bidders from participating.

What are the concerns with the privatization of BPCL?

The reasons for postponing the sale of the government’s 53 per cent stake in BPCL are not just the market conditions but it is also the policy environment that prevails in the country’s oil sector.

Therefore, even when the markets improve, the chances of a long queue of bidders for BPCL will remain low.

So, there is a need to reform the pricing policies that govern companies refining and marketing petroleum products.

What steps have been taken by the government for the reforms in the petroleum industry and the problems associated with those reforms?

Many governments in the past have tried to deregulate petroleum product prices but they have failed to do so.

Oil prices are as regulated as any product in the pre-reform days of the 1970s and the 1980s.

Reform: The effort to dismantle the price mechanism for the oil sector was officially started in 2002. The administered price mechanism for the oil sector was officially dismantled.

This provided freedom to the oil companies to sell their products at a price determined by their own calculations on cost and return.

Problems: This led oil companies to declare their prices almost every fortnight but approval from the oil ministry was still required.

Even that little freedom for the oil companies was gone, when international crude oil prices began rising from 2004.

The then government decided to regain full control over prices of petrol and diesel and the oil companies were not allowed to fix the prices till 2009.

Reform: The petrol prices were made free from regulations form 2010. Further, under the Modi government diesel prices were also made free from the govt. regulations.

Problems: The government continued to have an indirect control on retail prices of petroleum products.

The government tried to fix the prices of petrol and diesel and they also raised taxes when international crude oil prices fell.

Therefore, oil refiners and marketing companies never enjoyed the true freedom in pricing their products.

Reform: The government set up the Petroleum and Natural Gas Regulatory Board in 2006.

It was set up to protect the interests of consumers and entities engaged in activities relating to petroleum, petroleum products and natural gas, and to promote competitive markets.

Problem: But the regulatory board has been insufficient to fulfil its aims.

These all issues have led to the inability of oil companies to develop a transparent system of fixing prices.

How have private companies perform in the petroleum sector?

They entered into the retail markets but later withdrew due to government-controlled pricing. Therefore, the regulatory and policy gaps in the pricing and distribution of petroleum products should be removed.

However, fixing the regulatory and policy gaps in the pricing of petroleum products would be a big challenge.

What can be the course of action?

First, the way out is to grant full freedom to oil marketing companies to fix the retail prices in a competitive environment.

Second, the government could declare a subsidized band of prices for petrol and diesel as it does for cooking gas.

Third, the transaction of the consumer should be linked with Aadhaar based system so that the consumers could claim the difference between the subsidized and market prices.

• This difference could be transferred to their bank accounts.
• This will make the oil companies’ costs and returns would become more transparent

Fourth, it is also important to safeguard the oil marketing companies from political intervention to freeze or bring down retail prices of petrol and diesel.

• This would ensure stability will also encourage the private sector to expand their retail operations in this sector.