The height of ability, it could well be argued, consists in having the right inkling about the price of commodities and things. Consider, for example, the price of natural gas. With the empowered group of ministers okaying the pricing formula for RIL’s gas find in the Krishna-Godavari basin, albeit with modifications, the price discovery process calls for a closer look.

On the face of it, it does seem that the mandate for “competitive, arm’s-length price” envisaged in the production sharing contract has been met not wholly or partly but very substantially indeed. The way ahead is a proactive market design for stepped up gas usage, competitive prices and better allocation of resources.

It is welcome that the EGoM has decreed a five-year validity for the price formula of Reliance. Given that the earlier, tentative formula was reportedly valid only for three years, the increased time period for the pricing method ought to mean more competitive prices, especially assuming other parameters in the marketplace change.

Also significant is that the biddable component in the initial price formula has been set at zero, the linkage to crude oil prices has been capped at a lower level and that actual landfall prices would reflect the going rupee-dollar exchange rate. But it cannot be gainsaid that getting the political executive to vet, modify and okay gas prices is eminently avoidable.

Instead, what’s surely needed is a transparent and regular system of price discovery, and with independent regulatory oversight in place, given the panoply of rigidities very likely in the supply, transportation and distribution of gas.

It is notable that in the US, where the gas market is the most developed, rules of thumb for gas pricing have existed for years, although with full deregulation of well-head prices over a decade ago, gas prices there are now market determined. One set of simple rules use constant ratios between gas and crude oil prices. A third rule links the gas and residual fuel oil prices at the burner tip to prices for gas and crude at the main trading hubs.

Hence the 10-to-1 rule, under which gas price is one-tenth the price of crude. So a price of $20 per barrel for the bench-mark West Texas Intermediate (WTI) crude would imply a gas price of $2 per million Btu at trading hub, and a $50 crude price would point at $5 price for gas.

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