Deregulation of petroleum industry: is it an option for India now?

Government believes that the desired attributes for the petroleum industry can ultimately best be met in an environment of minimum governmental intervention and regulation. Government will therefore provide an environment within which the petroleum industry can conduct its business effectively and on a competitive basis….The cornerstones of the future policy framework of india will thus be deregulation of petroleum industry...

Degulation is the process of complete removal of government regulations or control on an industry, especially with regard to pricing of products. A deregulated market is characterised by competitive pricing determined by the forces of supply and demand. Deregulation is different from liberalisation because a liberalized market, while often having less and simpler regulations, can also have regulations (sometimes quite far ranging and complex) in order to increase efficiency and protect consumer’s and rights.

Objectives of Deregulation?

The objectives of deregulation are to increase competition within the industry, enhancing productive efficiency and competitive prices. The aim of deregulation is to expose the industry to market forces as a means of promoting efficiency. Deregulation usually takes place in markets.

Impact of deregulation ?

The government is likely to deregulate retail prices of petrol and diesel before its term gets over in April-May, in order to save the state-run oil marketing companies (OMCs) from losing money by selling the products at government-controlled prices.

The move may not be profitable for the companies in the near term, that the government will of course, regulate the returns and will not allow these companies to earn very high margins. The market share of the OMCs will, though, reduce once the private players enter into the fray, which will not be regulated by the move, but will price the products competitively to stay in the market.

Though this move will impact adversely to the OMC’s profit margin as they have to keep on reducing the prices of various products due to the entry of private players very frequently. Due to the reduced price margin, not much expansion of business will take place. It also impacts on the retailers not getting much financial help from the concerned OMC’s.

Though this is the best time to deregulate the retail fuel prices, when crude is trading at about $45 per barrel, the concern, however, is in the long term -- if crude prices move up, will the government be able to sustain a regime of deregulated prices?

Historically it has been demonstrated deregulation only promotes competition in the early stages. In the latter stages, it actullay eliminates competition as rivals are driven out of business. Owners feel the need to cut every corner possible, and both workers and consumers pay the price.

Latter stages of deregulation?

The latter stages of deregulation may look like this

• There is a perpetual elimination of the weakest companies, even when only strong ones are left
• During the heated competition phase, the name of the game is not prosperity, but survival
• Corporations become desperate to cut costs wherever possible to maximize profits
• Consumer and worker safeguards are reduced or eliminated
• Environmental safeguards are reduced or eliminated
• Convenience and comfort are reduced or eliminated
• Wages are reduced
• Workers are laid off by the thousands
• Production and workloads are pushed to the limit, often at the risk of life and limb
• Entire markets, for example, rural areas are dropped if they are deemed low-profit
• In the final stages, a monopoly or oligopoly emerges, after which prices are raised, services dropped, quality reduced, and corruption, anti competitive practices and abuses of power become commonplace; and Workers from failed companies continue working in their fields by either joining the few surviving giants (usually at lower wages) or working alone (always at lower wages). In other words, a monopoly or oligopoly will dominate the market.

Conclusion

The aim of the legislation is to increase competition in, and improve the efficiency of, the industry. Historical evidence suggest that, at least initially, deregulation did have the effect of reducing retail petrol prices against an international yardstick, but that after a few years the improving trend quickly gets reversed. For instance, in the case of Australia, deregulation led to few, if any, outbreaks of price-cutting of the kind that emerged in the larger Australian cities after the deregulation of that country’s oil industry. In general, the industry remained tightly oligopolistic in structure, with a ten year period during which no entry occurred, suggesting that the constraint provided by the entry threat was less onerous, and the entry barriers were higher, than the deregulators had hoped. Non-price competition of various types—principally, for prime sites, branding and service quality—was the major tool used by the petroleum companies to maintain or increase market share against the competitive thrusts of rivals. The entry-induced price cuts suggest that the incumbent companies prior to entry were charging supra-competitive prices, and making excessive profits in consequence. The apparent prior weakness of price competition is consistent with the presence of collusive behaviour.