Oil politics: The poor bear the brunt again

The recent petroleum price hike in Nepal was the result of reconciliation between the partial payment obligations of the outstanding dues to the creditors and Nepal Oil Corporation’s bid to increase revenue by passing on the additional burden to consumers. But the accumulated loss of Rs. 176.92 million was the result not only of selling oil below the global

rate under inefficient government management system, but also regular siphoning

of oil in border areas.

The price hike will have an adverse impact on the costs and prices of a range of commodities since intermediate inputs enter into the costs of production. The inevitable rise in current price will therefore necessitate revisiting the existing inflation rate in order to address the assumptions made during the formulation of three-year interim plan.

People are at a loss to identify the invisible hands that have worked to raise oil price. The Nepali Congress heads the coalition government. A secretary from the same government justifies the increase but central committee members and party’s sister organisations contest the decision. This is unique oil price politics, beyond layman’s understanding.

Even in India, it has been seen at times that the party chairperson behaves like the defender of common man’s interests while the head of the government from the same party acts as a pragmatic policymaker and justify the hike. For example, some time ago, the UPA chairperson Sonia Gandhi recommended rolling back the petrol price by Rs. 4 but Manmohan Singh and the petroleum minister did not accede to the request. While increasing the price of petrol and diesel, the Indian government was least bothered about freezing the price of kerosene for the ultra-poor and offering subsidy in the price of gas, also used by the common man.

The price of crude oil was only $79.73 just back in July. On Monday, Oct. 29, 2007, oil price soared to above $93 a barrel from less than $40 a barrel (bbl) in 2003. The rise in the price and nationwide protests by concerned stakeholders will inevitably have serious impact on public transport, offices, educational institutions, market and commercial establishments. Under the existing framework of pegged exchange rate and capital mobility, the important factor of inflation should be measured vis-à-vis India. Nepal will enjoy control over domestic inflation only in the short term. In the long run, checking inflation is out of the government’s control. This necessitates establishing a mechanism to regularly monitor price developments in India and harmonise domestic prices in Nepal accordingly.

A conflict-prone and fragile economy like Nepal should look for every opportunity to develop renewal energy to offset the unaffordable payment for petro-products. The Asia-Pacific nations, for example, are now paying $400 billion more now to what they paid in 2003. There is no denying that the price of petro-products should be adjusted to be at a par with import prices, but Nepali authorities have failed to convince the consumers about the efficacy of such a policy.

Despite the fact that cost-effectiveness of public sector has always been questioned when compared to the much more efficient private sector, Nepali politics has overshadowed economic and technical justification for diffusing state monopoly of distribution of politically vulnerable products.

Before complete privatisation of NOC, measures have to be worked out to cushion the impact of rising oil prices on the profitability of the public oil company within the internationally practiced public-private partnership modality. The politics involved in handling of NOC and its inherent inefficiencies has virtually closed the door to monitoring and managing fluctuations in oil prices in the global market so as to safeguard people from the adverse effects of inflation.

Many countries place supply constraints to achieve market stability.Import duties on daily commodities like wheat and pulses have been cut drastically. Unfortunately, these measures have not helped to bring down the prices. First, the market does not respond to such policies. Secondly, the commodity price behaviour in Neapli market is indifferent to government policies.

NRB has selected 21 market centres, four in Kathmandu Valley, ten in Tarai and seven in Hills to maintain the Consumer Price Index. But the public institutions cannot even regulate the erratic price behaviour in these centres, not even preceding and following the policy changes. This is the reason people are unable to meet increasing costs of healthcare, which in turn is linked to the increasing cost of drugs.

The poor suffer as policies fail to link fluctuating incomes and rising prices. As the rise in prices of essential commodities is not just seasonal but also a structural phenomenon, there is a need to set up a price stabilisation fund to protect the vulnerable from the onslaught of unstable international prices.

Pyakuryal is professor of Economics, TU