The oil price hikes and the boiling frog syndrome!

The oil price hikes and the boiling frog syndrome!

There was this (now proven to be incorrect) story that we have all heard about the fact that if you put a frog in the water that is then boiled gradually, the frog does not jump out of the water. Subsequent scientific tests have disproven this (the frog will jump out once the water is warm enough), but the gist remains. If things deteriorate gradually- most people will take longer before reacting. There is a lag before people decide that enough is enough.

Policy decisions often take advantage of this behavior. Take fuel prices for example. The Oil Marketing companies probably need to increase oil prices by Rs 10-15, in order to match the current market prices of crude. If there was an increase of 15% in the prices in one go, it would have resulted in a lot of protest. However, we have seen a gradual rise in prices – 80 paise per day, for nearly 10-12 days now. Gradually, the price of petrol and diesel has gone up by 8-10%.

Now while people are noticing it, the boiling frog syndrome may be at play here. Increase prices slowly, people dislike it, but the magnitude each day is not enough for a major dissent. There may be a threshold beyond which people will protest, but you can stop raising prices once the threshold is hit. The price can also be reduced once you find that point of protest.

On the contrary, if you hike the prices in one go, it would have meant a binary event. It would have likely resulted in huge backlash, and the government would have found it difficult to keep the prices elevated.

Luckily, crude oil prices have come off from their peak a few weeks ago (USD 130), and we hope they remain here or go lower. If crude prices spike again, then there would be a potential challenge at the hands of the government. They surely cannot keep hiking oil prices endlessly. Let’s hope the global crude prices come down, for the sake of Indian economic growth.

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