The privatisation of petroleum industry

This is a response to one of the articles I read from my friend Mahesh’s blog. He was talking about the privatisation and its effects on petroleum industry. He felt that government should run the petroleum sector, as no private company will be willing to offer any subsidies to consumers.

However, I think there is a better way to do this. I hope there will not be any contradiction to the fact that it is competition that breeds efficiency. This article is an attempt to marry of the benefits of privatisation to the petroleum industry with all its volatile nature of prices. After all I would like to show-off all that I had learnt in my last semester’s economics course. Hope you will not mind this, Mahesh.

Let private companies take over the production and distribution of petro products. Once it is privatised the industry will search for its own levels of optimum and efficient performance. The government in areas of need can use the proceedings of disinvestments. Education and schools will be one of them.

Coming to the subsidy, with all my economics fundaes, I can suggest a method. It is like this. As with our electricity bills where we have a slab system, the price of fuel should be higher for higher consumption. To achieve the differential pricing, each consumer gets something like a petro-card, which is already existent with many companies. But this card is not to promote the consumption like the existent ones but to discourage consumption. Whenever you buy fuel at an outlet, you will need to present this card, which has a record of your consumption for the month. In effect, so to say, you have to use this card like an ATM card or a Credit card to buy fuel. Based upon your consumption you will be billed. You can get the first 50 litres, say at the present prices. But as your consumption increases the subsidy decreases and you will have to pay more for the next 50 litres. All these transactions recorded electronically will help the government to pay the differential. It will not only ease the pressure on government for equally subsidising those who really need petrol from those who are not in such a dire need, but also will lead to efforts in reducing unwanted consumption.

According to economics, each consumer has a certain price he is willing to pay for a product, which need not be the market price. Some are willing to pay more for the same item than others. This difference between the price/value consumer places on an item and its actual market price is called the consumer surplus. This current fixing of market prices will treat alike those with a higher and lower consumer surplus. Hence due the current scenario, consumers whose willingness to pay less than many others or those with less consumer surplus also get the same treatment as those with higher surplus. To put in common language, a teenager who wants to take joy rides on his automobile gets fuel at the same price as an employee who needs fuel for his daily commuting. Hence the government subsidises both people alike, it has to pay the same price of subsidy, both for the joy rides as well as for a well-needed journey. Once this differential pricing in place, it effectively discriminates between the two people and will restrain the teenager’s joy rides and save on fuel. It will also lead to higher value realisation of taxpayer’s money, which is used in this subsidy.

In places, which are electronically isolated, coupons can be used instead of cards for the same. Also there is no need to discriminate people in the tax slabs. Only differentiations needed may be among industrial and personal consumption, emergency and government services.

This is a crude plan and needs to be fine-tuned. Nevertheless, it will largely help the government and the economy by a reduction, not only in amount of subsidy, but also in the consumption of fuel.

Warning:Copyrighted material. For implementation and usage of ideas, contact "The Economist"- Sri Vallabha Deevi.