Oil bonanza

The Nepal Oil Corporation, the sole importer and distributor of the petroleum products for Nepal, is reported to be considering reducing the prices of diesel and aviation fuel after months of a declining trend of the world price of oil. NOC had announced the last hike when the oil had well crossed US$140 per barrel, and it had cited the reason of unsustainable loss, stressing that the price hike before that had taken place when the global oil price stood at $83 per barrel. After both the increases, NOC was still incurring losses, though on a reduced scale. But now, in seven years, NOC has reported an overall profit. Its officials have said that it now stands in a position to make a monthly profit of Rs.18 million on Thursday’s purchase price of $80 per barrel that the Indian Oil Corporation had billed it. The world oil price has come down to $77 per barrel now; according to NOC officials, profit is expected to soar to Rs.200 million on this latest price when it receives its next oil bills. Currently, NOC is reported to be making a profit on petrol (Rs.16 per litre) and aviation fuel (Rs.30 per litre); however, it is still losing money on diesel (Rs.1.83), kerosene and LP gas (Rs.347 per cylinder).

NOC is reportedly considering cutting the price on diesel and aviation fuel. But it should not take any decision now, unless the revision is part of a sound mechanism that will automatically take into account even minor changes on the global market. But the failure to vary the prices according to cost has taken NOC into the red for several years. And during these past three years, the Nepalis have suffered acute shortages of the petro-products, because the government could neither raise the prices adequately, nor could it arrange for enough cash to pay for oil imports in required quantities. This irresponsible and insensitive policy led to great hardship for the people. But the present price bonanza has given the government a golden opportunity to make corrections, and put in place a mechanism for ensuring that unsustainable subsidy is not given and that oil is easily available at all times.

The considerable rise in the value of the dollar since the last oil price hike in Nepal has also helped bring down the world price of oil. But at the same time, it has also considerably reduced the value of the Nepali rupee vis-à-vis the dollar, meaning that an important part of the price decline has been gobbled up by this exchange-rate disadvantage. It is also worth considering that if prices rose considerably again, protests might erupt against any future price hikes; there will be elements looking for such an opportunity. But it will be a sound policy to cut the selling price when cost price falls, and raise it when the cost price rises. The government also needs to consider more than Rs.15 billion of debts NOC has incurred in selling oil at subsidised rates. It will be well advised to set aside at least a part of the profit to repay those debts. But profit should not go into wasteful expenditure, say, by unnecessarily increasing various benefits for the employees, as in the past. The government should also take the public into confidence by putting all the facts before the public and also taking steps towards cutting waste, leakage, corruption and inefficiency.