As the country battles with the fallout of rising crude, it is time for the policy makers to relook at the faulty pricing policy of petroleum products. More often than not, the blame of high crude prices is laid on the taxes - customs duty, sales tax and excise duties etc. The rationale for cutting taxes is definitely there, but when we talk about crude rising by nearly 50 to 60 per cent from the present levels, a harder look has to be given to the way the oil companies are paid for the production of petrol, diesel, LPG and kerosene. The present pricing structure was approved by the Cabinet on the recommendations of the Rangarajan Committee in mid-2006. The Cabinet approved a mix of measures to reduce the burden of continued mismatch between domestic retail prices and international oil prices against the projected loss (under-recoveries). The Rangarajan Committee had included a small increase in price of petrol and diesel, a cut in customs duty on petrol and diesel (from 10.5 per cent to 7.5 per cent), and introduction of trade parity pricing (based on 80 per cent import and 20 per cent export prices) at refinery gate for petrol and diesel, and the balance under-recoveries were to be partly made up by oil bonds to be contributed by the ONGC and GAIL. The estimated impact on account of shift to trade parity and reduction in customs duty on petrol and diesel was Rs 6,500 crore only. For example, if import parity price is $100 and export parity price is $90, the oil companies would get 80 per cent of $100 and 20 per cent of $90 totalling to $98. The government, by this method could reduce under-recovery by $2. What is faulty with this method is that consumers are paying international prices indirectly and then taxes on these prices. There is no rationale for oil marketing companies to get import parity and export parity prices, especially when these companies are refining products in India. "What is the purpose of setting up a refinery and importing crude when these companies have to be given import prices. It would be better to import products directly rather than doing the whole refining process if the international prices have to be paid,' said an oil pricing expert. The rationale of giving these companies trade parity prices was always opposed by various ministries within the government. The Planning Commission and finance ministry were opposed to the idea because they also believed that giving oil marketing companies such international prices was not justified at the expense of consumers. The finance ministry is of the opinion that these companies should be paid for their manufacturing cost plus a refining margin, which would be around 10-15 per cent . When calculated from the cost plus method, as advocated by the finance ministry, the cost of petrol and diesel will come down drastically and there may actually be no under-recoveries (loss) to the oil companies, as is being claimed. In the cost plus formula using international benchmark refining cost, the oil companies should be getting $80 for production of petrol and diesel. So, the government will not have to pay the heavy price of oil bonds on petrol and diesel and will have to issue bonds only for LPG and kerosene, which would be minimal.