Union Petroleum Minister Murli Deora has dismissed motorists’ hopes to pay less for fuel though the crude prices are in full retreat. Brent crude prices, which rose to a record high of over $147 a barrel in mid-July, are now moving between $112 and $115 a barrel.
The fall in crude prices is undoubtedly a big relief for New Delhi, which is contending with a double-digit inflation and the slowing down of the manufacturing sector.
But as our oil subsidy bill was $8.7 billion last year, largely on account of diesel and cooking gas, and is to rise further this year, Deora is not ready for a rollback in petro products prices yet.
He may, of course, reconsider the subject in the near future if crude, as many experts would like us to believe, has come to the “tipping point” and the slide will continue till it has come to $90 a barrel.
Whatever Deora may say, he must be under pressure from the UPA constituents, if not from his own party colleagues, to give some relief to consumers. After all, the Lok Sabha elections are due in May next year and the Left has withdrawn support to the government.
Why did the crude prices rise so fast in the first place? David Strahan, author of The Last Oil Shock, says the clue to the oil price-rise will be found in the global crude production stagnating at 86 million barrels a day since early 2005.
The principal culprit here is the lacklustre production performance of international oil companies in the face of the rising demand. The record profits that they earned last year were because of the soaring prices. And the Organisation of Petroleum Exporting Countries (Opec), accounting for 40 per cent of the global oil production, was not inclined to add extra oil to the market.
Strahan does not agree with the Opec proposition that rapid oil-price rises till mid-July was not caused by market fundamentals. Speculators, hedge funds in particular, took control of the market at some point and pushed the prices up and up, Opec says.
International Energy Agency, however, maintains that the bull run was not triggered by hedge funds putting in copopus amounts of money in oil futures. They came in when the market had already gathered steam.
According to Strahan, oil prices have also been “fuelled by the fact that consumers in many Asian countries are protected by hefty subsidies.” Our petroleum minister may be dismissive of this reasoning despite our oil subsidy accounting for 0.7 per cent of the GDP.
Take the case of China, the world’s second largest consumer of oil after the US. According to China Petroleum & Chemical Industry Association, despite high prices, the country’s demand for refined products in the first half of 2008 was up a stunning 14.6 per cent to 106 million tonnes on a year-on-year basis. The economy growing 10.4 per cent in that period created the condition for the big rise in oil use.
But what also helped in the prodigious rise in Chinese oil consumption is state subsidy. Last year, the Chinese oil subsidy was $40 billion. The Indonesian oil subsidy was half that of China. Strahan points out that such is the Chinese consumer’s appetite for fuel, evident in long queues at the gas stations that the price revision “may not make much difference” to demand. At this point, the Chinese consumption is estimated at 6.54 million barrels a day against 20.73 million barrels a day for the US.
It will be unfair to blame the Asian countries alone for giving fuel hand-outs. Some members of the Opec, including Saudi Arabia, have kept domestic oil prices at ridiculously low levels.
Governments have their compulsions to give subsidies, which though may be market distorting. In the present case, we find that while oil production has virtually remained constant at 86 million barrels a day, subsidies helped in fuelling oil demand in Asia in particular leading to price spikes. By the time crude started trading at its all-time high, the US and European naions had been hit both by recession and high inflation.
It is only natural that the recession-hit economies will try to do with less oil. The US is now using a million barrel a day less than last year. Japan too has effected a cut in oil imports. More motorists are using public transport whenever they can to keep their fuel bills in check. Profligacy is no longer in fashion.
