(This article was originally published on October 20, 2014) The Narendra Modi government has finally taken the bold step of liberalizing diesel price controls and raising petrol prices to some extent. The move will revive the retail fuel market and end the gas crisis. However, the oil-based industry needs to be more aware that oil is the most volatile and controversial commodity in the world.

Diesel deregulation is not a new reform. A decade ago, market forces were in full swing. New Real Industries, Essar Oil and Shell made a dazzling array of gasoline pumps that turned off the public sector, which was rapidly losing market share. Old, rusting state-owned gas stations have been transformed into modern retail outlets, complete with ATMs, modern car-wash facilities and even regular department stores.

Subsequently, volatility in the oil market destroyed the market. As oil prices soared and inflation became a non-political issue, the government subsidized the sale of diesel by state-owned companies, effectively eliminating private competition. In order to significantly restore the private sector, we need to know what will happen if oil prices rise again. Will state-owned enterprises once again compete on pricing?

Deregulation of diesel fuel remains a matter of course. The monster in the room is gasoline prices. Highly publicized audit reports, political campaigns, high-profile Supreme Court cases, sharp consumer demand, controversial corruption cases documented by federal authorities in the states, and the huge exploration costs of discovering oil and gas. Prices could be even higher.

Governments have made admirable efforts to balance the conflicting parts of the problem, but there is no perfect solution. But exploration companies need clearer information. Saturday’s decision sends a troubling signal to oil companies that oil prices will remain under state control. New gas discoveries in challenging and expensive areas will carry a premium. However, it is unclear how the premium will be calculated.

Companies need to know how much return they will get from their venture. When the last government tried to double the price of gasoline, the oil industry said the new price was, at best, a good transitional step to full market freedom. The government must remember two things. First, India needs new discoveries. Second, state-owned companies have not made significant discoveries for a long time.

While formulating policies, the government cannot take solace in the fact that international oil prices have fallen 25% and entered a bear market. This started on June 6th. percent since the monthly high of $115. Despite consumers’ optimistic near-term outlook, India must be prepared for a sudden rise in prices. The International Monetary Fund (IMF) has lowered its global growth forecast and the International Energy Agency (IEA) has lowered its oil demand forecast for four consecutive months.

Even more frustrating is that the OPEC cartel seems to have no intention of cutting production. In fact, stepping on the gas adds power. With the help of the shale oil revolution, the U.S. continues to increase supply and reduce imports. In short, supply exceeds demand.

But low prices set the stage for higher prices. They create additional demand, drive people to buy gas-guzzling cars, and make marginal oil fields unviable.

Unfortunately, the collapse in crude oil prices has made shale oil production no longer commercially viable. The cost of oil production in the conventional oil industry is about 25 barrels per barrel or less in dollars. Shale fracking and horizontal drilling can cost 60-80 or more dollars. This means that if oil prices fall further, which is likely, new investment in shale oil could be discouraged, and U.S. shale oil production, which has contributed significantly to the significant increase in oil supply, could also be hampered by high prices. Market.

In addition, when oil prices are low, existing exploration companies face an unfavorable risk-reward profile when looking for new oil and gas. Lower oil prices will dampen supply growth, increase demand and make renewables less attractive, setting the stage for higher prices. That is why, even as oil prices plummet, OPEC members are willing to maximize production, drive out inefficient producers, and help raise prices subsequently.

In this context, India must ensure that its policies maximize the attraction of investment in oil and gas exploration and ensure that diesel liberalization is not affected by low prices. A few years ago, oil prices were close to 150 Six months later, the dollar fell to 33 points USD. Now the opposite may happen.