The Price of Oil and the Wages of Stupidity

I have argued in the past that India is poor by choice — not by necessity, nor by a heavenly compulsion, or a divine thrusting upon, or an enforced obedience of planetary influences [1].

“Of course, that does not mean that every poor Indian has chosen to be poor. Someone else in a position of power made choices whose consequences are evident. India’s leaders – past and present – have consistently made choices that have had, and are having, a disastrous effect on the lives of hundreds of millions of human beings.” [From a post made in June five years ago.]

Economic policies chosen dictate the outcome. “Economic growth, development, progress—whatever you call it—is neither inevitable nor impossible. There are lots of examples of economies that continue to struggle with economic growth. And there are many examples of economies that have made rapid progress. What distinguishes the ones that that succeed from the ones that fail is economic policies.” [From a post made in December 2007.]

The fault lies in our economic policies, not the stars. So forget astrology when it comes to figuring out the future. Pay close attention to what economic policies the high and mighty are proposing.

Take the case of the pricing of petroleum products. For a long time to come, India will have to suffer the consequences of controlling them. Messing with prices is inviting disaster.

Omkar Goswami explains in his May 30th column in Businessworld (hat tip: Amit Panhale) how India once again made a major policy mistake in not decontrolling petroleum prices when it had the opportunity.

Any adult can make a mistake once. Even Twice. But when many adults responsible for the economic life of our nation enact the same mistake time and time again, you need to sit up and think. Nothing illustrates this better than the licence-control-commissar approach to the pricing of petrol, diesel, kerosene and LPG.

But I am getting ahead of myself. Here’s the story that will make you realise how peculiarly atrophied we are when it comes to decision-making. In January 2002, the price of crude was averaging less than $19.50 a barrel. It was when oil pundits spoke of a so-called ‘long-term equilibrium’ of oil ruling at around $20-$25 per barrel. It was also a time when a very far sighted man called Vijay Kelkar was the secretary at the Ministry of Petroleum and Natural Gas.

Kelkar figured that $20 per barrel was the best time to start dismantling the regime that controlled the prices of petrol, diesel, kerosene and LPG.

Kelkar produced a report which was ignored. The disastrous effect of controlling prices kept piling up over the years. The result we all know.

Reflect on what we have done. We have bankrupted three good public sector companies: IOC, BPCL and HPCL. We have not allowed prices to ration demand. Now we are talking of rationing petrol and diesel. Worse still, there are crazy ideas about raising petrol and diesel prices by over Rs 10 per litre in cities, but leaving village prices unchanged. You don’t take the right decision at the right time; you bankrupt oil companies and the fisc; you don’t allow prices to temper demand; and then you think of dual pricing which always fails before the ink is dry! What do you say about adults who make the same mistake time and time again? Words fail me.

Sure, words fail Goswami because he cannot use the word “stupidity” in connection with the politically powerful in the main stream media. But on this blog, I say it like I see it. Let me recall what John Kenneth Galbraith had said: “Ignorance, stupidity, in great affairs of state is not something that is commonly cited. A certain political and historical correctness requires us to assign some measure of purpose, of rationality even where, all too obviously, it does not exist.”

NOTES:

1. You may recognize some of the phrases I used are from Shakespeare’s King Lear Act 1 Scene II:

Edmund: This is the excellent foppery of the world, that, when we are sick in fortune,–often the surfeit of our own behaviour,–we make guilty of our disasters the sun, the moon, and the stars; as if we were villains on necessity; fools by heavenly compulsion; knaves, thieves, and treachers by spherical pre-dominance; drunkards, liars, and adulterers by an enforced obedience of planetary influence; and all that we are evil in, by a divine thrusting on: an admirable evasion of whoremaster man, to lay his goatish disposition to the charge of a star! My father compounded with my mother under the dragon’s tail, and my nativity was under ursa major; so that it follows I am rough and lecherous.–Tut! I should have been that I am, had the maidenliest star in the firmament twinkled on my bastardizing.

Author: Atanu Dey

Economist. View all posts by Atanu Dey