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Opinion National Interest PoV 50-Word Edit

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Why shielding consumers from rising fuel prices can backfire

IOC, BPCL, and HPCL have lost about Rs 20,000 crore due to the fuel price freeze. These losses will accumulate on balance sheets, raise borrowing costs, and circle back to the govt as contingent liabilities.

Brent crude has surged toward $120 a barrel since the US-Israeli strikes on Iran began, with analysts warning of the price reaching $150 or more if the conflict persists. Natural gas prices in Asia and Europe have risen 54 per cent and 63 per cent, respectively, in the week following the opening strikes. Jet fuel has surged $200 per barrel, diesel almost $180 per barrel.

When supply falls sharply and demand does not, a rise in prices is the obvious response in a market economy. This was Europe’s experience in 2022 — it let prices rise, taxed firms that profited, and undertook some redistribution. In India, petrol and diesel prices have barely moved.

The government has held the line absorbing the difference through oil marketing companies and implicit fiscal transfers. This begs the question: is shielding consumers from price signals actually protecting them, or is it simply deferring the cost, distorting the market, and ultimately leaving them worse off?

When a supply shock hits

It is worth beginning with first principles. When a supply shock hits, and less of the commodity is available, consumers need to reduce their consumption, producers need to find ways to bring more of the scarce good to market. These millions of individual decisions get coordinated through the price.

Consider a simple example: When onion........

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