Mukesh Ambani may have a stake in asserting that oil prices may go beyond $100 a barrel and that India should get used to living with high oil prices, but he is right. India should not be lulled into complacency by the recent decline in oil prices. Prices are likely to remain not just high but volatile too. The continued unravelling of the Greek crisis, with the future and effectiveness of the European rescue operation still not clear, has currently brought oil down to near $70 from the high eighties just a few weeks ago. It is realistic to assume that oil prices will bounce back as soon as there are unambiguous signs of a global recovery. This, in fact, captures the current dilemma. Oil prices will quickly go up as soon as there is confidence that the Great Recession is over but this rise will equally quickly put a question mark over the chances of the recovery being sustainable. We are thus in a position where the following four cannot happen together — China, India and the developed world growing at 10, 9 and 3 per cent, respectively, and oil prices remaining within $80.
Given this scenario, the urgent need across the world is to lower the energy intensity of growth so that poor countries can hope to grow fast enough to see an end to poverty in the foreseeable future and rich countries experience some growth worth the name. The challenge for India is particularly serious because of its overall energy deficiency and long-term dependence on imported oil. The only bright spot in this is production from new discoveries coming on stream but here also the pitch has been queered by two factors. The latest Supreme Court determination of the government’s overarching powers in determining gas prices and distribution has created an uncertainty over the prospects of global players coming forward in the future to invest in exploration. If they are unclear about their ability to sell even their share of production at the best prices they can get, then the investment risk can become excessive. What is more, India is far away from a gas grid that more or less equalises gas prices across the country and creates a national market for it. Without this, it will not be possible to factor in an optimum use of the gas resources of the country to give the best leg-up to the economy.
India, therefore, urgently needs to do the following — take steps to build a national gas grid and remove uncertainties that can be created for investors by official fiat. Besides, there is the overriding need to improve energy efficiency. India has joined other members of the G-20 in agreeing to rationalise and phase out over the medium term inefficient fossil fuel subsidies. But SUVs running on underpriced diesel remains a stark reality. There is an urgent need to end the under-recoveries in oil marketing and use it to offer subsidies through a clearly defined plan to solar energy where steady investment will yield great scale economies. As elections are not so near and the government is not dependent on the Left for its survival, now is the time to act.