The Indian government took a decision to deregulate petrol prices to give some breathing space to petro companies, who were facing losses because of the retail price ceiling. And petrol, being a rich man’s product could be inflated, while diesel could continue subsidized. And now the question is if deregulation of diesel is the way ahead.
I found this interesting article (relevant to Australia, though) that says that the production costs of petrol and diesel are equivalent, since they follow similar refining processes. I remember reading somewhere that the production cost of diesel is actually higher than the production cost of petrol and hence the former is priced higher than the latter.
But in india, given the farce of heavy taxes and then subsidies, diesel is cheaper than petrol because of the socialist idea that ‘common man’ is dependent on diesel and those who consume petrol can ‘afford’. Currently, petrol is about 40% dearer in than diesel. This means petrol cross subsidizes the diesel. As a result, consumers prefer buying diesel cars (they can afford petrol), while having to pay for the higher ‘upfront’ charges. Hence basic economics says that if your running is more than 1000-1200 km per month, its better to get a diesel car. In case of petrol, the variable cost exceeds the fixed upfront cost for the diesel engine in case of high running.
In the latest development, oil ministry is scared of freeing diesel costs, because this will hit inflation directly. And the government, as we see is scared of the WPI numbers every week.
Then why this farce of freeing prices on petro products? Reduce taxes, that will take care of most of the problem. The state applies VAT to the tune of 25% (in WB) and fills its coffers and the bulging abs of the law enforcers. The rising crude prices only increases the state coffers, as does rising demand.
India is a big country, and politics, and not economics determine the issues of national importance.