A V Rajwade: The economics of oil

WORLD MONEY

While the domestic pricing policy is crippling the public sector oil giants, is it really benefiting the people?

In the last week's article ("The politics of oil", August 22) , I discussed the possibility of US foreign policy vis-à-vis major oil exporters disrupting oil supply, taking the price to $100 plus per barrel.

In the meantime, the policies pursued by our energetic petroleum minister seem to be aimed at two objectives: securing supplies and controlling prices of key petroproducts.

The first one seems to be taking forms like the Iran-Pakistan-India and the Myanmar-Bangladesh-India gas pipelines. However desirable these may be, neither seems feasible in the foreseeable future.

As for the former, the stumbling block could well be the US, which considers Iran as a pariah state. And, Pakistan is unlikely to support the project unless the US agrees.

The prime minister himself acknowledged the problem during his visit to the US. As for the Myanmar gas, while the US may not be opposed, Islamic fundamentalism does seem to be rearing its head in Bangladesh.

The other direction in which efforts to secure oil supplies are going is investment by Indian public sector companies in exploration and production in Sudan, central Asia, Saudi Arabia, refining in Turkey, and so on.

The recent MoU between Laxmi Narayan Mittal and ONGC is also aimed at the same objective. Mittal's successful experience in making large investments in the central Asian countries, and the political doors he can open, would be useful.

Meanwhile, the domestic pricing policy is crippling the ability of the public sector oil giants to make investments. They have incurred losses of around Rs 20,000 crore last year "" and these could double in the current year unless economic prices for oil products get reintroduced quickly.

But already, there is a fallout "" IBP could be "sick" by next month. BPCL is reviewing its investment plan. IOC has incurred loss in the first quarter of the current fiscal year and its investment abilities would also be impaired.

With every prospect of oil prices continuing in the $60 plus range for the foreseeable future, how long will the government shut its eyes to the harm being done to the public sector oil companies?

Who is benefiting from the price controls? Two recent studies by NCAER and NIPFP evidence that half the subsidised kerosene meant for people below the poverty line, is being siphoned for adulteration of petrol by well organised gangs. There are also reports of kerosene being smuggled across the border because it is costlier in our neighbouring countries!

While the subsidisation of kerosene may have some socio-economic logic, despite the huge pilferages, there seems to be very little for petrol (are car owners and users part of the poorer sections of society?), LPG, and diesel, which forms a very small part of the total cost of delivering products to consumers.

On the other hand, this focus on securing supplies and the endless debate on prices, are having two very deleterious effects "" the lack of focus on conservation and on finding substitutes. Arguably, with petrol at, say, Rs 100 a litre, many car users would seriously start considering pooling.

Indeed, high prices would provide economic incentives for both conservation and development of substitutes. We have almost a hundred billion tonnes of coal reserves. Our current production is barely 400 million tonnes. Surely, high petro-product prices will lead to innovation in better exploitation of the coal reserves.

Yet we persist with artificially low prices "" and the holy "public sector culture" is hardly conducive to innovation. Meanwhile, we import about 10 million tonnes of coal a year, this could go up to 50 million tonnes in the next five years. Surely, coal gasification plants are also environmentally desirable, and economically feasible at current oil prices?

Reports convey that several agricultural commodities (oil seeds, sugarcane, jatropha, methanol and so on) can produce petro-products or substitutes "" at a price. So would wind and wave power, and oil from shale.

But subsidisation would not lead to serious investments in any of these areas as the investor would not be sure of what prices he has to compete with. (Private sector investments in LPG distribution were based on the assumption of termination of subsidies, something which is still to come true.)

The only area where there is some development is nuclear power "" but the Left, with its evident veto power on government decisions, will ensure that the agreement with the US does not go ahead. And, it will oppose contract farming or corporate ownership of agricultural land, without which agro-based substitutes would not be developed on a commercial scale.

But this apart, if world inflation remains low despite the sharp rise in oil prices, the reason is Chinese manufactures and Indian services which keep the prices of goods and services low worldwide.

Email: avrco@vsnl.com