Opinion: Decontrol of oil prices is good for environment and economy

While citizens are reeling under the increasing oil prices, a sustainability practitioner shares his opinion on why this is a good move for the environment and economy.

Government of India’s tough decision to decontrol oil and CNG prices has jolted the whole country and opposition has rallied together to oppose the move. But as a citizen I am very happy and in favour of the decision, despite the short term disadvantage of bearing more visible cost.

I would attempt to explain my view in economic and environmental terms:
• Any government is just the custodian of nation’s finances. The money comes (mostly) from and belongs to each individual as a citizen of the nation.

• The impact of any subsidy given out from this common pool to any particular segment and/or industry ultimately has to be borne by the nation as a whole.

• From above we can deduce that the larger nation pays for major part of the subsidy  and even the community getting the subsidy also bears the same, though indirectly

• Let’s take the case of most consumed commodity, and certainly the most imported in terms of quantity and money, – Oil ((72.74 Billion USD, 128,155 thousand tones). Diesel and Petrol has almost the same pricing in international market. In India the price of diesel is less than petrol, a central reasoning being that diesel is mainly used for commodity transport and goods movement (the other key rationale generally provided is that it is primary fuel for running DG sets providing electricity for irrigation purposes). But is it so?

• According to the The Financial express ( May 16 & Feb 9, 2011 ), there will be  more diesel cars than petrol carsas the difference between petrol and diesel increases. Credit Analysis & Research also substantiates the same in its  recent report * siting better mileage of diesel vehicles over petrol vehicles. This trend has already been spotted in UK  in 2010 ,according to guardian. In UK diesel Vehicles have already overtaken Petrol Vehicles’ sales*. Most of the trucks also run on diesel. Clearly these diesel run vehicles cause more pollution. The environmental cost of pollution and cost of healthcare to mitigate or address the impact of pollution related health issues runs into thousands of crores of Rupees besides reducing the efficiency and productivity of individuals. [Refer the automobile statistics by SIAM and fuel efficiency of different cars available in India] (refer to table 1 and 2).

• If we keep the prices low through subsidies or some other artificial measures, the impact of the subsidy, representing the difference between the price of imported oil and price at which it is sold in the domestic Indian market, is borne by all of us collectively as the citizens of the country. (Subsidy gives more money in hands of the consumer/citizens, hence increasing the demand of products and services. This leads to inflation.) On top of that as inflation rises, we as individuals collectively pay to the government. Higher the inflation rate, more the government earns at the cost of an individual. That becomes an invisible tax. Inflation in economy is considered as a hidden tax, but we will not get deep into economics in this article.

•  Now consider the users. As most of the cars are owned by upper class and upper middle class of India, covering roughly around 30% of the population, the subsidy benefits only accrue to them whereas the balance 70% of the nation bears the impact disproportionate to their consumption of oil (considering they use public transport or consume these products on a limited scale) . Indirectly even the 30% end up paying more due to increased inflation consequent to increased  fuel cost.

Impact of oil price decontrol:
The decontrol of the oil price would clearly ensure that consumers of oil pay greater attention to efficiency and wastage in personal transportation. Earlier with heavy subsidies, they didn’t have any incentive to save oil or increase efficiency.

Car and truck manufacturers will also start looking into technologies, which are more fuel efficient. Truckers would also look into these aspects and keep an eye on wasteful ways. Citizens would proactively look into and demand more energy efficient methods and products.

The combined effect would be a decreased import bill for the country, hence lower inflation due to low energy costs  and low cost to individuals. Economically poor people; who are not big consumers of oil, directly or indirectly, would not cross subsidize the effluent or big consumers as much as they were doing earlier.    
The fiscal deficit ( presently at 5.3 % of GDP) or overall deficit of the government would reduce and the government would have more resources and flexibility in funding infrastructure projects and investing in employment and health schemes, which would benefit the economically less privileged population of the country and for much longer terms.

Environmentally speaking, rate of increase in pollutants such as NOX, SOX and small particulate matter would begin to decline and in a decade would decline in actual terms as compared to the present decade.
Overall the bold decision of the government should be welcomed and as citizen we should keep a watch that it is not rolled back or twisted to benefit any particular segment or industry. This is one of the ways, which would bring in more sustainnovations!   

Table 2: Average milage of automobiles

• Tata Nano – - 23.6kmpl
• Fiat 500 — 22kmpl
• A-star –19.6kmpl
• Maruti 800 –16.1kmpl
• Maruti Alto–18.1kmpl
• Maruti Omni — 16.9kmpl
• Hyundai verna diesel -21.9kmpl
• Maruti Swift Dzire –15.9kmpl
• Chevrolet Tavera petrol – 13.3kmpl
• Honda Civic -15.5kmpl
• Honda CRV –13.2kmpl
• Skoda Octavia diesel -21.39kmpl
• Hyundai Sonata –13.54kmpl
• Skoda Superb –13.54kmpl
• Toyota Camry –13.54kmpl
• Hyundai tucson -14kmpl
• Mercedes C-class diesel C220 CDI — 13.9kmpl
• BMW 3 series diesel –15.9kmpl
• Mercedes S350 L petrol -9.9kmpl
• BMW X3 – 14kmpl
• Tata Ace Magic diesel – 21.5kmpl

The author Pranay Kumar is a sustainability entrepreneur and has worked on innovation in energy with IHS CERA, Boston.

Image(s) Courtesy:
gareth1953
Paul Garland
xJasonRogersx

Reference:
http://www.indiaautomotive.net
www.petroleum.nic.in
http://www.careratings.com/current/3/10516.pdf
http://www.financialexpress.com/news/cheaper-cleaner-diesel-burn-into-sales-of-petrol-cars/747861/0
http://www.financialexpress.com/news/smoking-car-sales-set-for-screeching-halt/791618/0
http://www.guardian.co.uk/business/2010/aug/05/diesel-car-sales-overtake-petrol
 

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Author: Pranay Kumar