The expert group report on pricing of petroleum products put out in early February 2010 called for a “viable long-term strategy for pricing major petroleum products”. Recognising the fa­ct that oil imports are increasing and that oil prices are “generally expected to rise” the group has recommended that “domestic prices of petroleum products have to reflect the international prices”. Th­is, they say, must be done to “limit the fiscal burden on government and keep the domestic oil industry financially healthy and competitive”. The group then recommended that both diesel and petrol prices must be market determined both at the refinery gate and the retail level.

Cut now to the issue of bio-fuels — the vision and goals of the national policy on bio-fuels, put out towards the end of 2009, when paraphrased, are to reduce dependence on pe­trol and diesel thereby contributing to India’s energy security while at the same time contributing to climate chan­ge mitigation and environmentally sustainable development.

This would obviously contribute to keeping ecosystems and populations healthy. The important proviso, of course, being that the “accelerated development and promotion of the cultivation of bio-fuel” plantations would be done in an environmentally sustainable manner. The policy calls for an indicative target of 20 per cent blending of bio-fuels - both by bio-diesel and bio-ethanol, by 2017, with bio-ethanol already being made mandatory.

The sugar industry has apparently quoted a price of Rs 27 per litre for ethanol to the oil marketing companies and they have asked for this price to be locked for a period of three years to remove uncertainties in revenue. However, it appears that this particular demand of the sugar industry would not be accepted by the government due to expectations that international ethan­ol prices may drop. Note that India allows duty-free imports of ethanol. The question that arises that while on the one hand, India is concerned about its oil import dependency and vulnerability relating to international oil markets, on the other hand, it is willing to expose itself to the vagaries of the international ethanol ma­r­ket. If the objective of bio-fu­el blending with transport fu­els is to reduce vulnerability to international oil prices in the short and long run, it would ob­viously make sense to peg the domestic price of ethanol and bio-diesel to the refinery gate prices of diesel and petrol and not to the movement of in­ternational ethanol prices. On the other hand, with more countries looking at the option of bio-fuel blending with petro-fuels, it can also be expected that international pri­ces of ethanol will align themselves more closely with international oil prices. The refinery gate price of petrol is ~ 31 per litre at an international crude price of $75/bbl, which makes the ethanol price at Rs 27 attractive even if oil prices were to drop to about $70/bbl (which is unlikely).

The question also is — why should the price of bio-fuels not be market determined as in the case of petro-fuels? If the policy on bio-fuels is stable and has a long-term vision, as it seems to have, then the minimum dema­nd for ethan­ol is establish­ed. What the regulatory system may then need to specify is a floor price for bio-fuels so as to lend some stability in price expectations to farmers but leave the cap to be determined by the demand-supply situation.

It is another matter that suspicions are high that the decision of ethanol blending was driven largely as a support measure for the sugar industry. And whether sugarcane production in India is environmentally sustainable in all the regions where it is grown or is it a function of the distortion in input prices of water and electricity and the support price provided to sugarcane are possibly matters of a separate debate. We would then be entering into the very tricky area of agricultural pricing. However, what the above factors highlight are the huge distortions that we have created in the pricing system in the energy sector and the challenges of sending the right signals for a sustainable development of this sector.

The writer is is executive director, Teri