Oil

           The oil industry in India is a relatively efficient and well-organized industry, particularly in respect of downstream operations. The is because most of the public sector companies operating at the downstream end have drawn heavily in terms of personnel and practices from established international oil companies. Also, given the fact that oil pricing has generally allowed these companies to earn reasonable returns, they have been able to invest in improvements and upgradation of equipment and technologies and, in general, maintain a level of efficiency in their operations, which have provided a healthy base to the industry's evolution and development. With the Government of India's move towards dismantling the APM (administered pricing mechanism), on the basis of which prices of oil products are set currently, there is a need to think through and implement early a post-APM structure for regulation of this industry.

           India's oil markets are growing rapidly, particularly since the oil-GDP elasticity is generally higher than unity. Large investment would, therefore, be required to meet the burgeoning demand for oil products. Indeed, this is an area which is beyond the scope of the public sector because the level of investments required is much higher than that which lies within the ability of the public sector companies to meet through generation of internal surpluses.

           Substantial changes are required in the regulation of the refining and marketing ends of the hydrocarbons industry as well. The removal of controls, particularly for purchase of crude oil, would lead to free sourcing of crude oil, independent determination of the slate of crude to be purchased, as well as the product mix produced by the refineries, and the removal of marketing and distribution controls. All these measures are expected to lead to an improvement in the efficiency of the downstream end of the hydrocarbons industry. Nevertheless, given the current state of downstream operations of the hydrocarbons industry, the role of the regulator would necessarily be limited. There would, nevertheless, continue to be a justification for some subsidization of supply of oil products, particularly in far-flung areas.

           Some systems, whereby energy security is ensured by maintaining adequate levels of stocks of crude and oil products, would also need special attention, along with several other issues that would directly impact on the prices of products allowed in the market. For instance, an oil company would have no incentive for adequate stocking to meet the country's overall energy security needs if the cost of such stockholding was not allowed as part of the cost and prices of products provided in the market. Hence, the regulatory body would need to lay down certain rules by which the oil companies would operate and ensure that the costs in meeting those rules are included with due care and careful estimation of their magnitude. Essentially, therefore, the role of the regulator would evolve over a period of time and it is expected to change from one of merely accounting costs and determining price on simple principles to one that requires some sophistication of analysis and understanding of the broad impacts of oil consumption in the country so that overall social objectives and national interests are served appropriately.