Wednesday, May 30, 2012

Is Petrol hike justified - partial relief likely soon.....


Demand and Supply are the fundamental concepts of Economics and basics of market economy.  Demand, simply is how much (quantity) of a product or service is required by buyers.   Supply on the otherhand, is how much (quantity) is available for sale – there of course would be other variants like the price, the place, the period, substitutes,  changes and more…

Demand is price-relative – it is how much of quantity the market desires at a given price. Supply represents how much the market is willing to offer at the given price.  The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.  When it comes to Supply, the  higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.   That would not apply to essentials – even here, on a longer period, the market forces would try to stabilize.  Even for an essential  commodity, people might strive to consume less and use less, if the price goes upward steeply.

Dr Manmohan Singh is a very learned person and he has tossed the market theories in his own manner………  the petrol prices went up, immediately, people would start speaking of not taking their vehicles out, pooling vehicles, going by public transports and more plans – theoretically, the steepest price hike ever should have driven people away and there should have been a situation where supply exceeds demands – thereby more available in the market..  Whosoever’s design it was – there was artificial demand – made acute by the panic reaction.. even after the price increase the petrol was not available, and people madly stood in queues fighting for a bottle of petrol at much higher prices at some places !!!! – now if you are still on a queue or have been thinking of running away from office in the middle in search of a petrol bunk where the fuel is available…………… wait…. (if only you can)

The good news is that 2 tankers carrying diesel and petrol  have docked  at the Chennai port on Tuesday [29/5/12] and a third set to steam in today.   The vessel of IOC with 26,000 kilolitres of diesel, reached the city before noon on Tuesday and began offloading its consignment.  Meantime, Chief minister J Jayalalithaa convened a meeting of officials and later said retail supply of fuel would resume by midnight.  The second vessel with capacity of 18000 kl of diesel would start pumping out soon today.   The third one, a smaller one, carrying 6,000 kilolitres of diesel is expected to arrive today evening.   Chennai Port has only one berth for oil consignments.  The chief minister said 2,000 kilolitres of diesel would also be brought to the city from Bangalore by road.  So the situation would ease soon and petrol would be available more easily after all the chaos.  

More than that, it appears that after the steepest hike, State-run oil marketing companies are ready to cut the price of the fuel by about Rs 1.67 per litre on 1 June when they undertake a ‘price review’, according to a report in The Economic Times.  As has happened in the past, the price rice would be corrected in shorter span – a tactics of appearing to provide some relief by loading too high and then removing something small later !!!  


It is another factor that the first justification every time has been that the State run Companies are incurring huge losses by heavy subsidies and supplies at a controlled rate !!.  Factually, Indian Oil Corporation (IOC) reported a jump of 3.24 times in standalone net profit to Rs 126.70 billion for the quarter ended March 31, 2012 as compared to Rs 39.05 billion in the same period last year. For the year ended Mar. 31, 2012, it has posted 46.03% decreased in consolidated net profit to Rs 42.25 billion as compared to Rs 78.30 billion for the year ended March 31, 2011.  Still Oil Companies, Ministry and ruling Govt while about losing money in selling fuel.  Remember all these profits comes after the mindless spending in advertisements and promotions and the high management costs of the Corporation.   Again a portion of this profit is aided by cash subsidies and payments from other state-run companies to compensate for the losses made from selling fuel at below-market prices.  There are reports that BPCL’s profit nearly quadrupled to Rs 3,963 crore. HPCL’s net profit also jumped more than 300 percent to Rs 4,631 crore from a year ago. Oil and Natural Gas Corp (ONGC), despite its subsidy-sharing burden, also managed to post a 102 percent jump in net profit to Rs 5,644 crore for the January-March quarter.

You may never understand the ground reality – it is not Rs.xx hike in petrol that the aamadmi suffers – it would hit him everywhere he goes – the commodities and vegetables will be up stating petrol hike,  even non-related thing like rent might go up – one has to grin and bear.  Petrol is not subsidized but this hike will push more people towards diesel, which is subsidized by Govt.   The Govt. has gone on record that it has no intention of hiking the prices of diesel, LPG or kerosene (which are bigger problems than petrol in terms of subsidies) in the near future.

As you count the holes in your pocket due to the petrol hike, know that nearly 40 percent of the price of petrol is made up of taxes by the centre and the states.   Centre wants the States to reduce the VAT to provide some relief !   Firstpost reports that Central Govt. levies a fixed excise duty of about Rs 14.78 per litre of petrol. States impose an ad valorem (value-added) tax, which increases every time the price of the fuel increases. Among the States, the BJP ruled Goa is different – it is the only State to have slashed sales tax dramatically in recent months: A few months ago, it cut nearly its entire tax on petrol, making the fuel cheaper by Rs 11 per litre.

So whether it is Centre, State or Oil Companies – all unduly benefit by every price increase……… if the rates are determined by market forces, that is determined by what they buy, why is that there has never been a steep reduction in price, when the crude oil barrel rates went down in International market.  The political game continues, and more people are out there in the hot Sun, standing in serpentine queue waiting for their turn for a bottle of petrol at inflated price !!!!

With regards – S. Sampathkumar.

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