Oil at $50

That the price of crude oil would hit $50 in the international market had become a near-certainty a couple of weeks ago. The questions now are how high the price will go, what it will do to the global economy, and to India's.

Opec at its last meeting demonstrated that while it wants prices to stay moderate, there is little it can do since there is virtually no spare production capacity left with its members (barring a little with Saudi Arabia).

The continuing uncertainties over Iraq, the new uncertainties about Iran and the disruption of production elsewhere have all taken their toll at a time when demand is peaking in the stock build-up for the winter. Unless the global economy slows, or production picks up in the trouble-centres, there can be little prospect of crude prices dropping.

High oil prices have traditionally signaled the onset of a recession. But in the three decades since the first oil shock, most economies have reduced the energy-intensity of their GDP, and this now provides some cushion. However, there can be little doubt that if prices stay at this level, the tempo of economic activity will be affected.

In this context, while it is tempting to criticize the petroleum ministry for continuing with the Ram Naik style of decision-making when it comes to the retail pricing of petroleum products, the ministry has a case to make when it argues that instead of raising prices, the duty and pricing structures for oil need to be reviewed.

It has been amply demonstrated that the entire structure of petroleum product duties and pricing is hopelessly distorted. The petroleum ministry did manage to win one round in the war to set things right, when the finance ministry agreed to reduce some duties so that petro-product prices would not go through the roof. But that is not enough.

Unless the government wants to lose it battle against inflation, it should address the pricing and duty distortions. Also, the level of competition in the industry has to be significantly increased, and incentive created for market challengers to play the price game.

This will act as a check on the super-normal profits that the oil companies have been making. The government for its part can afford to switch from today's ad valorem duty structure to one that has a cut-off price beyond which duties will not pile on to rising prices.

The revenue loss involved will be in the nature of giving up windfall gains, because the Budget was not drawn up on the basis of crude prices climbing to $50 per barrel.

Meanwhile, the high and rising prices of crude oil underline the need for the country to increase its energy security, to discover more domestic oil and gas, and to build up oil equity in other markets.

As things stand, the country is dangerously dependent on imports of the bulk of its energy supplies, a dependence that has been growing with each passing year.