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ves to last another 19 years

According to the BP Statistical Review of World Energy 2007India is in the company of Australia, Italy and Brazil whose reserves are also projected to last for 20-21 years from now.Iraq and Kuwait’s reserves are expected to last more than 100 years at their current rate of production, while that of Saudi Arabia is projected to last another 66 years.India has produced 0.807 million barrels of crude oil a day in 2006 compared with 0.780 million barrels in 2001. Meanwhile, consumption has grown by almost 13 per cent to 2.57 million barrels in 2006 compared with 2.28 million barrels in 2001 leading to higher dependence on imported oil. India’s estimated domestic proven reserves is 5.7 billion barrels as of end-2006. There have been some medium-size oil finds in the last five years including Cairn Energy’s discovery in Rajasthan.

What is APM all about?

The administered pricing policy of petroleum products ensures that products used by the vulnerable sections of the society, like kerosene, or products used as feedstock for production of fertilizer, like naphtha, may be sold at subsidized prices.

The country has traditionally operated under an Administered Pricing Mechanism for petroleum products. This system is based on the retention price concept under which the oil refineries, oil marketing companies and the pipelines are compensated for operating costs and are assured a return of 12% post-tax on net worth. Under this concept, a fixed level of profitability for the oil companies is ensured subject to their achieving their specified capacity utilization. Upstream companies, namely ONGC,oil and GAIL, are also under retention price concept and are assured a fixed return.

Reasons for Using APM

The first reason for intervention is to protect poor consumers so that they may affordkerosene for lighting, which is a necessity for those who do not have access to electricity.

Another objective may be to provide merit goods to consumers such as clean cooking fuels like natural gas, LPG and kerosene to replace use of biomass-based fuels such as firewoodand dung. These biomass based fuels create indoor air pollution that causes respiratory diseases,eye infections and result in many premature deaths, particularly of women and children. Also,use of firewood encourages deforestation and dung is better used as a fertilizer. Moreover, thetask of gathering these fuels keeps girls away from schools. Thus, use of clean cooking fuels hasmany social and environmental externalities, and as merit goods the government may promotethem through subsidies.

Another frequently reported reason for Government's intervention is to insulate the domestic economy from the volatility of petroleum prices on the world market. It is feared thatcomplete pass-through of increase in world oil prices may cause inflation which may persist evenwhen oil price comes down. There is no clear evidence that in an increasingly open andcompetitive economy, price movements triggered by changes in the prices of oil products wouldpersist over the medium-run. In addition, attempts to insulate the domestic economy againstvolatility requires discriminating between a secular price rise due to demand-supply forces and aprice rise due to transient causes such as speculation in the world market. This is difficult to do.

What is APM d