Friday, November 21, 2008

Statistics: Thou art synonymous to illusion

In the period between April-August 2008, crude oil prices saw a huge surge, in their dollar value. At its peak, crude cost $ 147 per barrel. In India, the oil marketing companies were losing a hell lot of money as the government did not allow them to raise the prices of diesel, petrol, cooking gas and kerosene. Petrol and diesel prices were frozen at levels which would be profitable with crude costing around $60 per barrel. Whenever there was a discussion on raising the prices of fuel, every person in the political sphere raised his/her voice against it. They condemned the government as anti-people, pro-rich and asked for taxes to be reduced, etc. On the other hand, the prices of products for industrial use were adjusted to reflect the rise in crude prices. For example, ATF prices at their peak were around Rs 77000 per kilolitre.

Now, with the fortunes of oil turning down and the cost dropping to $50 per barrel, the opposition is again screaming at the government for not reducing the prices of petrol and diesel. The prices of products such as ATF and fuel oil have been revised based on the current price of crude. Now, ATF costs around Rs. 45000 per kilolitre. The government is actually correct, when it says that the oil companies should be given an opportunity to recover the money they lost when crude prices were high. I may sound a capitalist, but in this world, there is no free lunch!! We as citizens of this country expected largesse from the oil companies when the prices were high. Most oil companies are owned by the government. This means, they are built and operated out of the our own tax money!! So, when we invest in the company, shouldn't we be looking at keeping it in a healthy position? By not raising prices of fuel, we eroded the value of our investment. Now, it is a chance to return the favour. The oil companies should be allowed to recoup all their losses and allowed to build profits. We should see our investment flourishing, rather than diminishing. The government being the largest shareholder, receives crores of rupees as dividend (if the company makes profit). This dividend can then be ploughed back into the economy for some fruitful use.

Now, coming to the illusory nature of statistics. The BJP (especially Ram Naik) has been claiming that while petrol costs Rs. 57-62 per litre, ATF is Rs 45-47 per litre. He cries hoarse, stating that the government is pro-rich and has therefore reduced ATF prices but not reduced petrol prices. Let us look at the simple mechanism behind the sale of ATF and petrol. ATF is sold directly by the oil marketing companies. There is no local petrol pump owner involved while selling to the customer. So, there goes the commission of the local owner. Second, the fuel tank of one aircraft (say a Boeing 737) when fully loaded, contains around 70,000 kg of fuel. So, at a given instant, the aircraft is a bulk buyer of the ATF. On the other hand, petrol is sold at retail levels, most buyers buying between 3-5 litres for 2-wheelers and 10-25 litres for 4-wheelers. This is analogous to the super-stores format. The super-stores receive discounts on various products which they buy in bulk from the manufacturers directly. This benefit is then passed on to the consumers. The neighbourhood mom and pop shop owner buys relatively less quantity from the wholesaler and therefore misses out on the discounts. If we were to look only at the figures of prices of petrol and ATF, we would definitely feel short changed. But, looking at the broader horizon over the past 8 months, we realise that what goes around, comes around. We asked for discounts then, we have to live with high prices now.

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