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Old 8th August 2011, 10:38   #241
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

If you assume $100/barrel (159L) Barrel (unit) - Wikipedia, the free encyclopedia, price per liter is about Rs.29, adding transportation and refining costs, the price is less than Rs.35/L. Actually India pays much less as it has long term price agreements.

So all the talk of subsidy is after the effect of taxes. Now you can add as much tax as you want and still claim that the fuel was subsidised, but that is a notional loss as you are only getting less tax and not paying out from your kitty.

Hence even if diesel is Rs.40/L GOI is making money, may be less than it wants, but definitely not loosing it.

The major effect of less expensive fuel is explosive demand growth, which may effect the Foreign Exchange Position, that and not subsidy is what matters most.
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Old 9th August 2011, 18:49   #242
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

My dear fellow Team Bhbians, Team-bhp forum had always stood for truth and ethical practices and the same being the reason why this community needs to be well aware of the truth!

Before mudslinging and calling names, the fact needs to cleared : There is absolutely no subsidy for diesel! There had been many previous posts which clears this fact but still some people fights for removing the subsidy which simply does not exist.

Let me warn you all of the long post this is going to get but is necessary to set certain facts right.

Myth : The reasoning of the Govt to increase the fuel price is that, the crude oil price have increased in international market. Our country is one of the biggest importer of crude oil. So since crude oil prices goes up, what can the Gov't do but to increase price.

Truth : Close to 25% of the fuel is from our own country, which means the prices of which need not be based on international crude oil prices.

The Cold Truth : Our country buys only close to 15% of our needs at international market prices, the rest is sourced from oil wells owned by Indian companies or are brought at long term pricing policy (which means we get it at far less the market price). We even get crude oil at 10-80% discount!

In other words, the dependency of our diesel/petrol prices on international market is very less!

Price calculation :
Today's crude oil import : 80$/barrel
Price paid for ONGC for a barrel : 45-50$/barrel
Avg price paid : 76$/ barrel ( Ignoring the above said benefits)
One barrel : 158.9 liters
For a liter of crude : 76/158.9 = 0.478$ = 21.5 Rs!
The cost of refining : 50ps/liter ( as per the refining companies themselves)

In effect, even if the oil companies take all expenses and major profit, a liter of diesel/ petrol should not be more than 24Rs!!!

When you buy a liter of petrol or diesel, imagine how much the government is ripping us as taxes! And they also have the average person to believe that they are giving subsidies!

The effect of higher cost of diesel is simply high inflation. Every rupee increase in diesel is snowballed into higher cost of anything and everything!
For a growing country like India, holding back cost inflation has to be one of the highest priority of the Gov't but instead they are happy taking claim on higher GDP. The effect is simple, for a country which post the second highest growth in the world, we had the second lowest growth in equity market last year!
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Old 9th August 2011, 18:58   #243
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

@channelv thanks for your post. Even if there is no subsidy on diesel as you claim- and I have no way of verifying if that is indeed true since you have not quoted any secondary sources- the point under discussion is: ASSUMING the cost of production of diesel and petrol are about the same, why is there such a big difference in the price paid by end-consumers for the two?

In Pune city today, petrol costs around 68/- while diesel costs 42/- (approx). That is a 60% difference! If you ask me, that seems to be a case of "subsidising" diesel vehicles at the petrol vehicle owners' expense.

From a historical perspective maybe it made sense to have this pricing structure in place: after all, diesel was used only by trucks and lorries that ferried essential commodities while petrol was a luxury reserved for the rich and their cars. In today's world the reality has changed: cars are no longer a luxury and there is an increasing trend of high-end personal vehicles using diesel. It's high time the prices of fuel were rationalised.
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Old 9th August 2011, 19:11   #244
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

Quote:
Originally Posted by channelv View Post
My dear fellow Team Bhbians, Team-bhp forum had always stood for truth and ethical practices and the same being the reason why this community needs to be well aware of the truth!

Before mudslinging and calling names, the fact needs to cleared : There is absolutely no subsidy for diesel! There had been many previous posts which clears this fact but still some people fights for removing the subsidy which simply does not exist.

Let me warn you all of the long post this is going to get but is necessary to set certain facts right.

Myth : The reasoning of the Govt to increase the fuel price is that, the crude oil price have increased in international market. Our country is one of the biggest importer of crude oil. So since crude oil prices goes up, what can the Gov't do but to increase price.

Truth : Close to 25% of the fuel is from our own country, which means the prices of which need not be based on international crude oil prices.
I don't know whether overall there is a subsidy or not - but why should the price of domestically produced crude not be benchmarked to international crude prices?

What you are proposing here ("need not be based on international crude prices") is a subsidy in another name. In fact it will be a reprehensible subsidy - oil resources of the nation are owned by the people, so in theory everyone should hold an equal share. On the other hand the subsidy (you may disagree - but what you are proposing is a subsidy by another name) will be enjoyed by the people who have high energy, specifically petroleum based energy, usage. This in practice means taking from the poor and giving to the well off.




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Originally Posted by channelv View Post

The Cold Truth : Our country buys only close to 15% of our needs at international market prices, the rest is sourced from oil wells owned by Indian companies or are brought at long term pricing policy (which means we get it at far less the market price). We even get crude oil at 10-80% discount!

In other words, the dependency of our diesel/petrol prices on international market is very less!
by "international market prices" you seem to mean spot prices. It is true that bulk of the crude is sourced under long term agreements, but I'll be surprised is anybody is giving India a 10% discount, much less an 80%, over the spot prices - most long-term agreements have force majeure clauses for precisely these eventualities. also, spot prices can actually be less than the long-term prices.


Of course, I may be wrong here, in which case I would love to learn more. Can you point out the sources for the 15% figure? I have been trying to dig into it for some time, without much success.

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The effect of higher cost of diesel is simply high inflation. Every rupee increase in diesel is snowballed into higher cost of anything and everything!
For a growing country like India, holding back cost inflation has to be one of the highest priority of the Gov't but instead they are happy taking claim on higher GDP. The effect is simple, for a country which post the second highest growth in the world, we had the second lowest growth in equity market last year!

While your thesis about higher diesel prices = higher inflation is true, most of the recent inflation (last year, perhaps last two years) has actually come about via higher food prices. And food prices have increased much much faster than anything related to crude. How much of that is govt.'s fault (a large part probably is) and how much has to do with international demand-supply (a alrge part definitely is) can be discussed.

Higher GDP growth rate translates into higher employment, and higher tax revenues - precisely what will be needed if govt. takes away the taxes on petroleum. Also I'm not sure what your comments of equity markets are based on - first of all growth rate is not the only thing that goes into equity investors' decisions, second last two years' growth (rather than last years alone) is much better than rest of the world combined - that much I can confirm as an investor.



A bigger fraud perpetuated on the people of India is that govt. always uses WPI instead of CPI (almost everyone in the world uses CPI) as a measure of inflation.




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Originally Posted by noopster View Post
@channelv thanks for your post. Even if there is no subsidy on diesel as you claim- and I have no way of verifying if that is indeed true since you have not quoted any secondary sources- the point under discussion is: ASSUMING the cost of production of diesel and petrol are about the same, why is there such a big difference in the price paid by end-consumers for the two?


Well, what he is saying is that govt. says it gives X amount in subsidy but then taxes Y over the product where Y>X so there is no subsidy.

You and I would basically disagree, you have given your reasons (and I agree), let me give another one - I am a recipient of LPG subsidy (as most BHPians would be) BUT I pay much more in income taxes every year (again most BHPians probably do). Can I claim "I'm not receiving any subsidy from the govt. because I'm paying so much more in taxes"?

Last edited by vina : 9th August 2011 at 19:15.
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Old 9th August 2011, 19:43   #245
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Originally Posted by noopster View Post
@channelv thanks for your post. Even if there is no subsidy on diesel as you claim- and I have no way of verifying if that is indeed true since you have not quoted any secondary sources- the point under discussion is: ASSUMING the cost of production of diesel and petrol are about the same, why is there such a big difference in the price paid by end-consumers for the two?

In Pune city today, petrol costs around 68/- while diesel costs 42/- (approx). That is a 60% difference! If you ask me, that seems to be a case of "subsidising" diesel vehicles at the petrol vehicle owners' expense.

From a historical perspective maybe it made sense to have this pricing structure in place: after all, diesel was used only by trucks and lorries that ferried essential commodities while petrol was a luxury reserved for the rich and their cars. In today's world the reality has changed: cars are no longer a luxury and there is an increasing trend of high-end personal vehicles using diesel. It's high time the prices of fuel were rationalised.
Thanks for the thanks but I was not trying to make a point but merely trying to dose down the unfortunate diesel vs petrol war in team bhp. Me owns two diesel vehicles and not because I love diesel but unfortunately my head takes over my heart cos of my high running.

As for your question, I have generalized certain facts in my post. The cost of refining crude was taken as approx 50ps by refineries but when broken down, different constituents have different cost of refinement and petrol is generally considered a little costlier than diesel.
But then again, as you rightly said, it should not have so much of difference, the answer lies in the simple fact that, petrol is taxed more than diesel. In reality, instead of fighting for cutting of non existent subsidy on diesel, we should be voicing our opinion on cutting petrol prices. Ours is not a rich country to be taxed so much for a inelastic commodity like petrol/diesel.

I guess the below link would give some more credible answers. Keep in mind, they have calculated the cost at 112$/barrel when today it hovers around 75$!

The real culprit behind high fuel prices in India - The 5 Minute WrapUp by Equitymaster
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Old 9th August 2011, 20:02   #246
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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. Keep in mind, they have calculated the cost at 112$/barrel when today it hovers around 75$!
Yes, the crude oil price has come down to $75 but the GOI is silent. Rather, busy looting motorists. Not only taxes on petrol are high. The nature of taxation also favours the loot by GOI. Instead of charging specific rate of duty, i.e. a fixed amount per litre, they charge ad valorem ( a fixed per cent on pirce of petrol per litre ). So, when the price of petrol goes up, the amount of tax per litre goes up even further. Thus, the increased tax amount adds to the increased petrol cost. It's a double-whammy. Opposition, Ramdev, Hazare and whole host of other activists, Commonman's Champions everyone is silent about this loot of commonman.
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Old 9th August 2011, 20:20   #247
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Originally Posted by noopster View Post
@channelv thanks for your post. Even if there is no subsidy on diesel as you claim- and I have no way of verifying if that is inusing diesel. It's high time the prices of fuel were rationalised.

Very well said. All the claims of "no subsidy" are based on conjecture, interpretation and no more. No one is producing any verifiable information/data to substantiate their claims. If the government is lying produce evidence to that effect. I will suggest to the "there is no subsidy" claimants to spare us their meaningless deductions a la the works of Arthur Conan Doyle.


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Originally Posted by vina View Post
I don't know whether overall there is a subsidy or not - but why should the price of domestically produced crude not be benchmarked to international crude prices?




A bigger fraud perpetuated on the people of India is that govt. always uses WPI instead of CPI (almost everyone in the world uses CPI) as a measure of inflation.







Well, what he is saying is that govt. says it gives X amount in subsidy but then taxes Y over the product where Y>X so there is no subsidy.

You and I would basically disagree, you have given your reasons (and I agree), let me give another one - I am a recipient of LPG subsidy (as most BHPians would be) BUT I pay much more in income taxes every year (again most BHPians probably do). Can I claim "I'm not receiving any subsidy from the govt. because I'm paying so much more in taxes"?

I have also heard similar pleas that since we are not provided social services of the quality we desire therefore we are entitled to diesel subsidy.

That is a plea which is specious to the extreme and is absolutely bereft of any common sense whatsoever. If you are so civic minded and wish to hold the government to account, take the trouble of dragging the government and it's minions to court for negligence/corruption/dereliction of duty whatever you desire. There are people who do it. Such citizens also pay their taxes and do not make claims that they should be absolved from paying taxes or should be provided rebates in the taxes they pay because of such claimed lack of quality services by the state. Further they compare the services they get here with the services available in countries where direct taxes(income taxes) are north of 50%.

About the thesis that higher fuel prices cause higher inflation. Let me throw this at you. At one point I was associated with a freight moving business. At that time, the cost of freight as a percentage of the value of the consignment was about 5-7% in the case of grains(rice) that we used to move from Delhi to Mumbai. I have no reason to believe relationship would have altered substantially. Now please note rice is a low value product. The base(unit price) being low the freight cost constitutes a higher percentage. Move on to higher value products such as cooking fats/pulses and the likes the percentage falls even further. My point? This contention is absolute unadulterated nonsense. The fuel price rise causes only a marginal impact on inflation. It is the god damn manufacturers and traders who use the ruse of increased fuel prices to jack up their profits beyond reason.

What I find very annoying is people take such a myopic view of a subject that impacts our very existence in a manner that is beyond their comprehension. Any bloody subsidy, as was pointed out in this very thread, adds to the fiscal deficit.The more the deficit the more the debt the government will take on and the more it will be inclined to raise taxes The state being a sovereign borrower always gets the best rates for the debt it floats. That will push up rates for private sector borrowers. As inflation increases due to the monetization of the fiscal deficit all hell will break loose. The first monetary policy response is to enforce tight money. rates go up again. Do our friends who hanker after cheap diesel want to end up facing a scenario where their business will be subject to a recession? Am I exaggerating? People should read up on the circumstances prevailing at the time when Dr Manmohan Singh, our Honbl Prime Minister, presented his first budget as the Finance Minister of the Union of India.


If someone wants a serious debate I have copies of the C Rangarajan committee, Kirit Parekh committee and the 6th Report on Petroleum product pricing presented by the Ministry of petroleum in the Lok Sabha. I will upload the same to the TBhp servers. Read them. then make informed comments.
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Old 9th August 2011, 20:25   #248
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Originally Posted by vina View Post
I don't know whether overall there is a subsidy or not - but why should the price of domestically produced crude not be benchmarked to international crude prices?

What you are proposing here ("need not be based on international crude prices") is a subsidy in another name. In fact it will be a reprehensible subsidy - oil resources of the nation are owned by the people, so in theory everyone should hold an equal share. On the other hand the subsidy (you may disagree - but what you are proposing is a subsidy by another name) will be enjoyed by the people who have high energy, specifically petroleum based energy, usage. This in practice means taking from the poor and giving to the well off.
In a truly capitalistic world, this happens to make sense. And me being a business man loves this concept but in reality, to keep the cost in check, most commodities are cost controlled by the Gov't to keep the prices at check. This is not a India specific factor, in most countries this happens.

There are many other natural resources like Iron Ore and other precious metals which are controlled by the Gov't. The gov't even bans export to keep prices in check. There was also a case of Ambani brothers fighting it out on the pricing of our countries natural resource and the Gov't happily did nothing until the Supreme Court decided to intervene.

Having said all that I do not disagree with you and same being the reason why I have not taken that into account for the calculation.

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Originally Posted by vina View Post

by "international market prices" you seem to mean spot prices. It is true that bulk of the crude is sourced under long term agreements, but I'll be surprised is anybody is giving India a 10% discount, much less an 80%, over the spot prices - most long-term agreements have force majeure clauses for precisely these eventualities. also, spot prices can actually be less than the long-term prices.
I have not considered even this fact as this figures change from time to time but the figures are available from balance sheets of Indian fuel companies. The discounted prices could be basically from our own companies owned oil wells outside the country. But then again, these discounts are also written down as our oil companies also needs to make profit plus there is a transportation cost involved.

Quote:
Originally Posted by vina View Post

While your thesis about higher diesel prices = higher inflation is true, most of the recent inflation (last year, perhaps last two years) has actually come about via higher food prices. And food prices have increased much much faster than anything related to crude. How much of that is govt.'s fault (a large part probably is) and how much has to do with international demand-supply (a alrge part definitely is) can be discussed.
Most of the food prices are not related to international demand supply as most food grains are banned from exporting. The cost on transportation is an important factor in food prices. You can see for yourself what has happened to Inflation every time Gov't increased the price of diesel.

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Also I'm not sure what your comments of equity markets are based on - first of all growth rate is not the only thing that goes into equity investors' decisions, second last two years' growth (rather than last years alone) is much better than rest of the world combined - that much I can confirm as an investor.
Business Line : Markets / Stock Markets : Indian stock market among worst performers this year

Form my understanding, the FII pullout is basically the main reason for the fall in stock market and inflation is a big reason for it as the Gov't had to hike interest rates.

Quote:
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A bigger fraud perpetuated on the people of India is that govt. always uses WPI instead of CPI (almost everyone in the world uses CPI) as a measure of inflation.
Agree with you and irrespective of political parties, all follow the same.

Quote:
Originally Posted by vina View Post

Well, what he is saying is that govt. says it gives X amount in subsidy but then taxes Y over the product where Y>X so there is no subsidy.

You and I would basically disagree, you have given your reasons (and I agree), let me give another one - I am a recipient of LPG subsidy (as most BHPians would be) BUT I pay much more in income taxes every year (again most BHPians probably do). Can I claim "I'm not receiving any subsidy from the govt. because I'm paying so much more in taxes"?
Well there is a little difference, from my little understanding, the subsidy of LPG is more than the taxes and the percentage of tax on LPG is much less compared to petrol/diesel.

Again long post my sincere apologies to everyone.
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Old 9th August 2011, 20:38   #249
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Yes, the crude oil price has come down to $75 but the GOI is silent. Rather, busy looting motorists. Not only taxes on petrol are high. The nature of taxation also favours the loot by GOI. Instead of charging specific rate of duty, i.e. a fixed amount per litre, they charge ad valorem ( a fixed per cent on pirce of petrol per litre ). So, when the price of petrol goes up, the amount of tax per litre goes up even further. Thus, the increased tax amount adds to the increased petrol cost. It's a double-whammy. Opposition, Ramdev, Hazare and whole host of other activists, Commonman's Champions everyone is silent about this loot of commonman.
I was wondering why no one was asking the same. The percentage of tax on petrol/diesel have not changed much from days when it was sold at 10 bucks!
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Old 9th August 2011, 20:42   #250
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Agreed. The GOI should do what is plainly obvious. Allow the market to do it's work. NO EXCEPTIONS.
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Errr... I think you might find that that is the philosophy that created the economic mess that is now America. Not necessarily a good idea at all.
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OT but disagree . Market economics is a oft quoted term in US but the mess is because it was abused badly like one big frenzy - one can't blame the philosophy please .
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Thank you for responding to the idea. I do not agree with your response though. Since this is not the place to be discussing this, suffice it to say, markets with some amount of regulation, not classic "laissez faire", are infinitely better than the god forsaken mess we are stuck in.
Market driven economies does have some amount of benefits to offer to the general public. However speculation on the commodity prices can only drive it up and not down. All over the world there is an increasing awareness to control speculation on commodities and hopefully that will come to pass.
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Old 9th August 2011, 21:12   #251
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Market driven economies does have some amount of benefits to offer to the general public. However speculation on the commodity prices can only drive it up and not down. All over the world there is an increasing awareness to control speculation on commodities and hopefully that will come to pass.
Markets are susceptible to greed. Uncontrolled greed causes corrupt practices - most visible example of such happenings is in the USA the sub prime catastrophe being the most infamous incident. That does not take away the benefit of creativity that the profit motive brings to an economic activity. The answer lies in regulation of markets in a manner that is transparent and punitive to any infractions.

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Old 9th August 2011, 21:32   #252
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Markets are susceptible to greed.
Uncontrolled greed causes corrupt practices - most visible example of such happenings is in the USA the sub prime catastrophe being the most infamous incident.
My point exactly.

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That does not take away the benefit of creativity that the profit motive brings to an economic activity.
I find this statement of yours contradicting your above statement - as in creativity due to greed in manipulation of markets has always brought loss to the shareholders and also the corporations.

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The answer lies in regulation of markets in a manner that is transparent and punitive to any infractions.
This has never happened before and realistically speaking I don't think will happen in the future

You may live in the ideal utopia of course and speak to benefits outweighing the flaws. However in the real world that is not the case so far.
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Old 9th August 2011, 21:43   #253
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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My point exactly.



I find this statement of yours contradicting your above statement - as in creativity due to greed in manipulation of markets has always brought loss to the shareholders and also the corporations.



This has never happened before and realistically speaking I don't think will happen in the future

You may live in the ideal utopia of course and speak to benefits outweighing the flaws. However in the real world that is not the case so far.
Rather than find issue with what you say, I will say without reservation that I agree with you. Effective regulation is a very hard goal to achieve and more often than not there is always a shortcoming.

Now let us go to the flip side. State controlled economic activity. No greed. No incentives for productivity. You have seen the result. Marx and his dogmas now share the same grave. So I will plump for the lesser of the two evils, as just like you I too am a realist and do not live in Utopia.
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Old 9th August 2011, 21:50   #254
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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Rather than find issue with what you say, I will say without reservation that I agree with you. Effective regulation is a very hard goal to achieve and more often than not there is always a shortcoming.

Now let us go to the flip side. State controlled economic activity. No greed. No incentives for productivity. You have seen the result. Marx and his dogmas now share the same grave. So I will plump for the lesser of the two evils, as just like you I too am a realist and do not live in Utopia.
No chief, I am not arguing for state or central control of anything. All I am saying is that if you increase more speculation, then you indirectly end up increasing govt. intervention. Just look at what is happening in America.

If you notice I am not arguing against market economy. I am only arguing against speculation on commodities like Rice, Crude oil, coffee, onions, etc. You know common man's concerns. So I am arguing to drop commodity trading altogether or removing certain items like crude oil, agricultural goods, etc. from this form of trading.

Last edited by gshanky : 9th August 2011 at 21:54. Reason: typo
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Old 9th August 2011, 23:08   #255
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Default re: Rationalising diesel prices*Update: 50p rise/month announced*

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No chief, I am not arguing for state or central control of anything. All I am saying is that if you increase more speculation, then you indirectly end up increasing govt. intervention. Just look at what is happening in America.

If you notice I am not arguing against market economy. I am only arguing against speculation on commodities like Rice, Crude oil, coffee, onions, etc. You know common man's concerns. So I am arguing to drop commodity trading altogether or removing certain items like crude oil, agricultural goods, etc. from this form of trading.
Non industry participation is the bane of all commodity markets. Meaning? The finance houses are the ones buggering up the system. Any easy fixes? Actually yes. Throw the finance houses out of the commodity trade. Let actual demand and supply prevail. We might even get cheaper fuel and not be having this discussion for some more time.
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