Solution to Oil price woes!!!!!!

The reason for oil price rise in the world is two fold.
a) Supply side shocks: This includes political instability in oil rich countries like Nigeria, Iraq etc...
b) Demand side: This includes phenomenal increase in demand from countries like India and China and the rest of the developing world.

Problem with oil in India and China is that it is heavily subsidized. So what happens is users do not see the oil price as reflected in international markets and instead oil companies bear all losses which have to be financed finally by the government. This means that demand for oil is much higher than the what it should be at the price prevailing in international markets.

Now to suggest that Government of India should pass on the burden of oil entirely to the consumers is neither humane nor politically feasible. That government which does this is bound to loose the elections. But what can be done is have a differential price regime for different types of users of petrol and diesel. What I am proposing here will not only solve the problem of petrol price but also that of traffic to a large extent.

There are three types of passenger vehicles that use petrol.
a) Two wheelers
b) Four wheelers
c) Public Transport (Buses)

Now the government can have different prices for petrol which will ensure that considering the average no. of passengers these vehicle can carry and the average mileage of the vehicle, all these three end up with same value for petrol (in litres / person / kilo metre ).

so essentially what this means is that when you fill petrol in the bike you pay 25 Rs / Litre while if you fill it in car you pay 75 Rs / Litre.

This is an economically efficient scheme which will ensure prudent use of a scarce natural resource like petrol. The best part of this scheme is that it is going to be politically popular because majority of the voters travel via two wheelers in India and the car owners don't have the patience to stand in the line and vote in any case.

Very rarely you encounter a scheme which can solve a difficult problem in an economically efficient way which is also politically not catastrophic. The only problem that I forsee is development of black market for petrol for cars. But proper institutional and legal mechanism can be put in place which can ensure that corruption stays within acceptable limits. With differential price regime you can not eliminate corruption but if you can control it enough so that the overall objective of the whole scheme is satisfied than I think it's worth it.

Any troubled congress politician listening????????