Ill-informed debate on oil decontrol

The government has finally hiked the prices of diesel, kerosene and LPG, though by less than recommended by the Kirit Parikh Committee. It has decontrolled petrol , and hopes to decontrol diesel in due course. But its timidity suggests that price controls will return if global oil prices shoot up again.

Financial TV channels had discussions clearly favouring decontrol. But politicians on news channels were overwhelmingly against any price rise. Their objections included exaggerations, halftruths and plain falsehoods.

They said this was a political issue affecting the common man, and could not be treated just as an economic matter. Yet, dozens of countries across the globe have no price controls.

The common man in Japan, the Philippines or the US treats changes in petrol and diesel prices as no more political than changes in the price of bananas or eggs. Only when governments impose price control do prices become political, and that’s the best reason for avoiding controls. India had no oil price controls till 1973, and price changes were not seen as political then.

Indian politicians claim that the common man will be pushed into poverty and privation by the price hike, while farmers and agriculture will be ruined. That’s plain wrong, and such claims have no basis either in other country experiences nor India’s own past. The common man faces price changes up and down in any market system.

In a non-market communist system, all prices can indeed be controlled forever, but the collapse of the Soviet Union showed how myopic and bankrupt such an approach really was. Price controls can provide shortterm relief to consumers, but act as longer-term disincentives to production and efficiency, the cumulative impact of which toppled communism.

Deng Xiaoping in China moved towards the market fast enough to escape a Soviet-type collapse. Countries without price controls have far outperformed those with controls, in terms of poverty removal no less than GDP growth. Yet, Indian politicians on TV talk as though Soviet-style price controls are the only rational and humane way to manage economies.

Indian politicians claim that price decontrols will spur inflation. But despite price controls, India has 10% wholesale price inflation and 14% consumer price inflation.

By contrast, inflation is just 2-3 % in the US, Europe, Japan, the Philippines and other countries without price controls, where consumers are paying in full for the doubling of crude price from $40 to $80 a barrel over the last year. Inflation is caused by faulty fiscal , monetary and trade policies, not by price decontrol.

Diesel and petrol have gone up around 5%, which is hardly sensational. Yet Indian politicians say the back of the common man will be broken.

Really? Between 1970 and 1973, crude went up from $1.20 a barrel to $3.65 a barrel, and this tripling was passed on in full to the Indian consumer. Then Opec became an effective oil cartel in 1973-74 , and oil shot up to $10 a barrel . Once again, the Indira Gandhi government passed on the rise to the consumer . Obviously it hurt. But the economy adjusted, and agriculturists did not commit suicide.

Next came the second oil shock of 1980. Crude tripled from $10 a barrel to $30 a barrel. Again, Indira Gandhi passed on almost all the burden to the consumer. Once again, the consumer adjusted , with no economic collapse or impoverishment.

Indeed, poverty started falling for the first time after Independence . Leftists claimed that farmers would be decimated. In fact, the green revolution spread fast after the first oil shock of 1973-74 , and again after the second oil shock of 1980. Higher petrol and diesel prices went hand in hand with falling poverty and rising farm production.

Communists are the biggest critics of higher prices, claiming that these are an artificial creation of speculation by ‘international financial capital’.

This is eerily Hitlerian. Hitler too claimed that the global economy was controlled and distorted by financiers, who were mainly Jews, and so resorted to mass murder of Jews. Communists perpetrated mass murder of another sort, based on class rather religion, but with as little moral or factual basis.

To be fair, communists are not alone in blaming financial speculation for artificially driving up oil prices. The trading volume of oil futures and derivatives has skyrocketed in the last decade, when prices too skyrocketed before nosediving. Academic studies have investigated the possibility that financial speculation made oil prices especially high and volatile.

But these studies failed to establish a link. Other commodities like iron ore, coal, uranium and cobalt are traded for physical delivery only in the spot market , and have no derivative markets.

Yet, the prices of iron ore and coal proved if anything more volatile than that of oil. Iron ore shot up from $40 to over $200 a tonne in the boom.

Why so? Well, 2004-08 witnessed the mother of all booms, with world GDP growing at a record rate. Environmental and safety clearances made the opening of new mines a lengthy process. Hence, commodity supplies could not keep up with demand, and enormous price spikes were the result. The oil price spike was not exceptional. For every financial seller there was necessarily a buyer too, so speculation did not create one-way trends.

Why has trading in oil futures and derivatives skyrocketed? Some of it is pure speculation. But much trading is now related to risk management, both by suppliers and consumers, who hedge against adverse developments by locking in future prices. This constitutes a rational form of insurance. Communists who condemn this blindly as ‘international financial capital speculation’ are simply exposing their ignorance.

These comrades need bogeymen to justify their life-long defence of communist murder and torture in pursuit of a bankrupt economic ideology. Rather than learn from the collapse of the Soviet Union, they would rather use old, hollow slogans to justify the unjustifiable. When exposed by newspapers like this one, they have no factual reply, but repeat empty slogans about the pink press being the voice of international financial capital. How pathetic!